NEW YORK ( TheGoldAndOilGuy.com) -- I would like to start by wishing you Happy Holidays and a Happy New Year!
So far, this year has been a great one for trading, and I expect 2014 to be as good or better. I'd like to talk about the stock market and what is likely to unfold in the next week or two so you can protect your investments.
As many of you know, I follow and post frequently on StockTwits.com. I like to see what traders and investors are thinking/feeling about the broad market using extreme sentiment readings as a contrarian signal. This helps me develop trade ideas or protect open positions more by tightening my protective stops and locking in partial profits.
Below I have posted two charts on sentiment courtesy of StockTwits.com to show these extreme readings for the U.S. stock market. The first chart is of the symbol $STUDY, and this sentiment shows us that 98% of trading material is bullish on the stock market right now. My theory is that if most traders are moving in one direction, you'd better be ready for them to change direction. The masses move like a school of fish, and once they get spooked, they change direction and start selling everything they just bought.
The second sentiment chart is of the SPDR S&P 500 ETF ( SPY) exchange-traded fund. It tracks the S&P 500 index and is also a gauge for broad market sentiment. If we think back to the 80/20 rule, we know that 20% of the crowd/clients are correct while 80% tend to be incorrect. Sentiment is reaching the highest level in a couple of months, the index is making new highs and there's the holiday price bulge. Logic says a pullback in the near term is very likely and that it could be sharp and almost like automated trading.
Market Sentiment -- Broad Market Contrarians Indicator