There are different ways to measure market sentiment. For example, through
In this article, we will examine another bearishness indicator based on what investors are doing, not what their opinions are.
Cumulative Cash Flow Ratio
By measuring the ratio of
- Cumulative Cash Flow of "Bear + MM" and
- Cumulative Cash Flow of "Bull+Bear+Sector+MM"
For comparing with S&P 500 (in solid black line), we have inverted the ratio (in dashed line) to be:
in the chart (click the image to enlarge). We have also superimposed the "trend following indicator" Parbolic SAR on the ratio.
Interpretation of Parbolic SAR
SAR follows price and can be considered a trend following indicator. Once a downtrend reverses and starts up, SAR follows prices like a trailing stop. The stop continuously rises as long as the uptrend remains in place. In other words, SAR never decreases in an uptrend and continuously protects profits as prices advance. The indicator acts as a guard against the propensity to lower a stop-loss. Once price stops rising and reverses below SAR, a downtrend starts and SAR is above the price. SAR follows prices lower like a trailing stop. The stop continuously falls as long as the downtrend extends. Because SAR never rises in a downtrend, it continuously protects profits on short positions.
As discussed in , the primary trend of US stock market is down. However, currently we are in a counter-trend rally. From the high ratio of !CCFBEARM:!CCFLALLEX, the sentiment trend is becoming more and more bearish (i.e., moving lower in the chart above). Be vigilant, enjoy the rally while it lasts!