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Climbing a Wall of Worry?

Insects swarms. Fish swim in schools. Birds fly in a flock. Animals migrate in herds. Financial markets trend and investors/traders tend to follow the crowd.


Climbing a wall of worry is a financial phrase that depicts the market’s resiliency in front of a host of negative factors. A “wall of worry” consists of economic, political, geopolitical, medical issues significant enough to adversely impact consumer and investor sentiment. The market’s ability to climb a wall of worry often leads to investors becoming increasingly confused as to whether this is time to take profits or is it time to buy more into the rally.


The market participants who are sitting on the sidelines or traders that have shorted the market grow frustrated each day as the market trends higher and refuse to pullback. There are two powerful human emotions at play – fear and greed. A wall of worry tends to play on the former, but it can also trigger the latter.


Climbing a wall of worry is probably the least understood but one of the most powerful crowd behaviors of a bull market. Like all market behaviors, the central theme is the dissemination of information, whether real or imaginary that influence your mindset. It is not even whether the information is valid or false, but how influential the information is to change crowd behavior as it relates to consumption and investments. It takes only a few dire predictions from market pundits and experts to change your opinion about the worry. Repeat this a couple of times a day for several weeks, and you have a market trend that is “climbing a wall of worry.”


Many investors are struggling to determine whether the stock market is in a bull phase that is climbing a wall of worry or whether the fear is justified, and the recent bull rally may be nearing an end. Investors and traders are human beings and as such are emotional creatures driven by human traits. When emotions become the primary driving force of investment decisions they tend to lead to herding. When this becomes prevalent and widespread then it may be worthwhile to step back and review contrarian indicators including many of the popular investor sentiment indicators and consumer confidence surveys are telling us about the market environment.


The general theory of any contrarian or sentiment indicator is that by the time everyone has turned bullish on the marketplace the uptrend is nearing an end. Conversely, when everyone turned bearish the downtrend is nearing a bottom and due for a trend reversal higher. Widespread bullish or bearish consensus often occur at extreme levels of a major rally or a major decline. It tends to lead to potential pivotal turns in the marketplace.

So, what are the sentiment surveys (i.e., AAII, Investors Intelligence, and Wall Street Sentiment), consumer confidence indicators (i.e., University of Michigan Sentiment Index), and contrarian trading indicators (i.e., Put-Call ratio) suggesting about the stock market?


To the surprise of many, the contrarian indicators are rather mixed. Some of the sentiment surveys have turned decisively bearish (i.e., American Association of Individual Investors – AAII survey and the University of Michigan Consumer Sentiment Index). However, a few have displayed increasing bullish tendency trends (i.e., Put-call ratio, Wall Street Sentiment, and Investors Intelligence Bulls and Bears survey).


Upon further review of the above contrarian indicators, you can say that there is a visible divergence between retail investors, who are decisively bearish, and professional investors, who are bullish. This discrepancy between the two investors does not often occur in the financial marketplace. This may be the reason for the recent shift toward a stock picker’s market environment as professional investors are forced to favor a handful of strong sectors and stocks (i.e., cash strong, well-capitalized, and secular/structural growth stories in specific markets, sectors, and industries such as Technology, Healthcare, Communication Services and select Consumer Discretionary).


Attached below are popular contrarian indicators for your review.





Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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