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Sentiment towards a number of key trading instruments is seeing the December Federal Reserve policy meeting, where FED Chair Jerome Powell doubled the pace of QE tapering and laid the path for three rate hikes in 2022.
Trading sentiment is most effective when retail traders are running counter trend, meaning that they are heavily leaning against established market trends and in increasingly large numbers. Additionally, once big sentiment skews build it can be a powerful sign that the retail crowd are being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent is considered to be at an extreme level, while market sentiment readings over 80 to 95 percent is often a strong indication that the trade could be topping or about to reverse at any time.
I will now look at some the strongest sentiment bias amongst the retail crowd right now. Some of the sentiment skews suggest that current price trends in FX, stocks, and precious metals are breaking point and big moves may be nearing.
GBPUSD – Betting on a hike
According to the ActivTrader Market Sentiment tool traders remain overly bullish towards the GBPUSD pair, despite the fact that the pair continues to struggle below the 1.3300 handle.
The ActivTrader Market Sentiment tool shows that 73 percent of traders are expecting more upside in the GBPUSD pair. This positive sentiment bias could be hinting that more losses are coming.
Traders are in wait and see mode ahead of the BoE. For me, being overly long sterling is a big risk if the central bank fails to hike rates and talk up the risks of the rapidly spreading Omicron variant in the UK.
Silver – Irrationally bullish
The ActivTrader market sentiment tool shows that traders are 96 percent of traders are bullish towards higher silver prices, despite the FED doubling the pace of tapering in yesterday’s December meet.
Traders are clearly not worried about the effect of QE tapering on the shiny metal, as they believe the safe haven states of the metal and its ability to be an inflation hedge are enough to be bullish on the metal.
It must be said that is leads me to believe that silver could start crash soon, as historical data has shown that not only is one-way sentiment a reversal signal, but QE tapering is historically very bearish for silver.
DJIA – Still long
Market sentiment towards the Dow Jones Industrial Average, which is still of the top indices of index in the world, shows that nearly three-quarters of traders are expecting more upside in industrial and blue-chip stocks.
The ActivTrader market sentiment tool showing that some 74 percent of traders currently bullish towards the index, despite the doubling of QE tapering, and the eventual end of tapering next year.
Traders need to consider that bullish sentiment towards the index is a red flag, and that the index could reverse at any moment as the FED reverse their bond purchases in a low growth environment.
