What the sentiment is signaling to us?

A few days ago I posted my blog indicating the current sentiment was extremelylow in general per the CNNMoney sentiment index. There is another well followed sentiment index that is regularly published by The American Association of Individual Investors (AAII). It just posted its most recent reading: Bullish investors have declined to 25.3%. Bearish investors are above 47%, a ratio nearly 1:2 in favor of bearishness. This is among the worst we have seen for this year.  We got similar readings three times this year on April 12, June 28, and October 25. As we often say, history may not repeat itself but often rhymes. So it will be interesting to see how the market was doing before when there was extreme bearish sentiment. See the chart below where I marketed the four time points with such a low sentiment, including the current one. You don’t need to be a rocket scientist to see the consistent pattern how S&P was doing each time following the time when everyone was depressed, right? Yes, a sizable uptrend at least for a short term!

As I said, I have been expecting a year-end rally now. Although I don’t know how highs it can go, I feel more confident that a rally is coming pretty soon. Maybe at least towards it 50 DMA which near 2800ish as I’m writing? I know there is a lot of uncertainty making people really nervous, especially about the coming Trump/Xi meeting whether or not they could make at least a hand-shake verbal deal on Nov 30. Of course no one knows for sure but the TA is signaling that we are in the course of a rally in the weeks ahead. As always, TA may not always be right but I like what I’m seeing and would like to position myself for such a rally.  But just be cautious with an appropriate risk management in place and more importantly don’t overplay with leverage!