Why will the market likely go lower in the near future?

 

A very quick dip out of historically extreme optimism

Key points: Dumb Money Confidence has retreated quickly from a historically high extreme The shift in sentiment has taken only a week, one of the quickest shifts in 25 years Rapidly declining sentiment has most often preceded further short-term declines, but longer-term gains Trend-following traders are pulling back their expectations...quickly As November came to an end, we looked at some signs that sentiment was becoming overheated. Among the most prominent examples was Dumb Money Confidence, which surged to nearly 90%, one of the most extreme levels since we began computing this in 1998. The few other times when trend-following traders got this confident, stocks struggled, except for the abnormal trend in 2021. In 2010, the S&P 500 peaked almost immediately after and fell into a multi-month pullback.

What the research tells us... Contrarian investing is challenging. The times when you think it should be easiest, when sentiment is genuinely extreme, are those times when it's not. Returns are actually more consistently negative after lesser extremes because those are the ones that occur during unhealthy market environments. Still, the shift in sentiment over the past week has somewhat alleviated the extreme, and when it happens this fast, there is usually more to go. But it would be highly unusual if it morphed into a larger and persistent decline.   by SentimenTrader