Sentiment towards a number of indices in Europe are seeing big changes as the so-called “Santa Claus rally” sweeps from global stock markets as risk on sentiment remains at elevated level. As 2022 approaches, it is a great time to check out how traders feel about the market from a sentiment perspective.
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 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.
FTSE100 – Still Short
According to the ActivTrader Market Sentiment tool traders remain overly bearish towards the FTSE100 at a time when UK stocks are starting to struggle after posting recent strong gains.
The ActivTrader Market Sentiment tool shows that 76 percent of traders are expecting heavy losses in the UK100. This large negative sentiment bias could be hinting that more gains are coming.
Traders that are short the UK100 could be in trouble if we judge sentiment alone. If the move higher continues, we could easily see more strong percentage gains in UK blue chip stocks.
GER40 – Turning bearish
The ActivTrader market sentiment tool shows that 61 percent of traders are bearish towards the leading German index, despite German stocks performing a strong pre-Santa Claus rally.
Traders are clearly worried about the current energy shortage and upcoming ECB meeting, as they believe that the recent recovery in European stocks will not stick around for long.
The upcoming European Central Bank policy decision before the new year and Christmas is another reason why traders may be short. They could be expecting the central bank disappoints.
EURO50 – Trading Sideways
Market sentiment towards the EURO50 is turning slightly more bearish, despite the fact that the index has been moving higher over recent weeks and is still very attractively priced.
The ActivTrader market sentiment tool showing that some 48 percent of traders currently bullish towards the index, despite the impressive move above the 4,000-resistance zone.
Traders need to consider that bearish sentiment towards the index is not that high, it could mean that most traders are actually expecting range bound trading conditions.