Bearish Sentiment Should Worry Traders, But It’s Not What You Think

by | Sep 13, 2021 | Stocks

There’s a saying out there that “Stocks only go up.” 

Of course, we all know that’s not true. Thousands of stocks go down every day… 

But just look at the S&P 500 over almost any multi-year stretch, and you’ll see what they’re talking about… 

Over the past five years, the S&P 500 is up over 100%. In the past 20 years, it’s up more than 230%. 

Yes, there were some major corrections in those time frames… But overall, stocks keep going up. 

So traders should be worried when the market sentiment cycle turns bearish, though, it isn’t for the reasons you might think… 

Gap and Go — Volatility in the Market Sentiment Cycle

This past week ended with a lot of bearish bets hitting the tape. 

And then over the weekend, market sentiment cycled the other way. 

If you looked at the S&P 500 futures index this weekend, then you saw we gapped up about 10 points on Sunday and continued to rally about 25 points Monday morning. 

That’s a pretty big move and if we want to understand what caused it, we need to ask ourselves a couple of questions. 

First, was there any big news? Not really, so that’s a bust… 

Next, we need to see what happened the week before and where we are in the market sentiment cycle.

There are a few ways to put this puzzle together. 

My routine typically involves browsing through financial Twitter and a few news sites. I’ll also look to see if there’s been an uptick in put buying. 

This means a growing number of traders think that markets could take a turn, which is what happened this past Friday. 

When that sentiment is all over Wall Street, then no news is great news. 

That’s when things can get out of hand for the bears — the markets gap up and just keep on going. 

Check out the video below and let’s talk about how gap and go scenarios happen, and how we can leverage them when they do. 

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WRITTEN BY<br>Lance Ippolito

WRITTEN BY
Lance Ippolito

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