One of the more popular guides to investing utilizes Contrary Opinion. Contrarian investors sell when the majority are buying, and buy when most are selling. Bullish and Bearish sentiment metrics seek to find periods when Sellers or Buyers have moved to historical extremes and have nearly exhausted their funds available to keep the underlying trend in motion. This can be a bit of art and science as new information of varying importance can alter the amplitude of sentiment extremes. Essentially Warren Buffet, the Oracle of Omaha, is a legendary contrarian investor looking for long term bargains and extreme oversold conditions to purchase assets. His iconic status sent the airline stocks to new lows this week when it became known that the Oracle was selling all airlines. While the negative consensus in airline and travel stocks have been prevalent for weeks, our general stock market contrarian measures shown here have a good track record for the one to 3 month perspective.
The outline we shared in March was for a late March low, 2nd half April rally peak and another setback in mid to late May. While our indicators rebounded from extreme oversold levels on March 23rd, the April 29th peak has presented an unusual sentiment split lacking consensus. As can be seen in our chart, one measure of option trading has shown a clear overbought level of optimism for several weeks as prices have peaked. Another grouping of opinion related metrics have only moved from oversold to neutral on this 35% rally in stock indices. A third gauge of small investor sentiment has oddly stayed in deep oversold territory despite the stellar stock surge in April. In fact small investor pessimism hasn’t been this high in 7 years. This perfect split in our gauges has never occurred before and warrants a degree of patience as a consensus begins to form. Our short term bias remains lower for the next week with a break under 2727 cash $SPX and 2717 June SP to confirm a downtrend. Longer term, we expect a more sideways pattern to sink in as the Summer progresses, once the current up cycle peaks.