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Traders’ sentiment towards the top three US indices, the S&P 500, Dow Jones Industrial Average, and the Nasdaq has seen a big shift over this week ahead of the so-called earnings season in the United States.
The sentiment shift has seen traders turning more bullish towards the leading three indices towards the top of their respective trading ranges. The same group of retail traders recently got caught wrong sided during the recent multi-week advance in the mentioned indices to fresh all-time record highs.
Potentially, the sentiment shift is not a good sign. And indeed, it could mark the start of a wider technical correction ahead of earnings seasons, when heavyweights such as Google and Apple are set to release their latest company results.
Typically, Market sentiment readings for an instrument that have reached around 75 to 80 percent are considered to be at an extreme level, while market sentiment over 90 to 95 percent is often an indication that the trade could be peaking, and about to reverse at any time.
Neutral reading typically indicate indecision, while sudden shifts in sentiment can potentially mark trend reversals. With that said, we are seeing the start of such a sentiment shift amongst the retail crowd right now towards indices.
S&P 500- Crowd Turns Bullish
According to the ActivTrader Market Sentiment tool some 65 percent of traders are currently bullish towards the S&P 500. This is interesting as a major shift has taken place amongst the retail crowd.
The ActivTrader market sentiment tool showed that almost 80 percent of traders were bearish towards the S&P 500 during its advance from the 4,000 to 4,190 level over recent weeks. It should be noted that retail traders typically have poor market timing, so this sudden shift could be meaningful.
It is worrying that 65 percent of traders are expecting the uptrend to continue ahead if earnings season. Watch out for a potential bullish trend reversal in this index if retail sentiment remains this high.
Dow Jones Industrial Average – Skew Shift
The ActivTrades market sentiment tool shows that traders are on the fence towards the Dow Jones Industrial Average now, with 51 percent of traders bearish and 49 percent of traders bullish.
It should be noted that this even split is usually indicative of range bound trading conditions. However, traders have grown much more bullish since last week. The same set of traders almost entirely missed out on the recent run to the 4,000 level and remained bearish the whole time the index was advancing.
The scaling back of bearish bets is quite alarming, and especially if we consider that the DJIA is overbought on many technical metrics right now.
Nasdaq – Buyers Beware
Market sentiment on the ActivTrader platform currently shows that 55 percent of traders are bullish towards the Nasdaq. Traders are growing increasingly bullish ahead of the so-called tech earnings season.
The retail crowd have been ultra-bearish towards the Nasdaq over recent weeks so we should be careful now that the herd now believe that the index is going higher. Overall, alarms bells are ringing as the retail crowd is growing bullish right at the top index’s range.
