Where Are We in the Typical Sentiment Cycle?



For more than six months, investors have had shown at least Returning Confidence and even Enthusiasm. That's according to the latest correlations to a Typical Sentiment Cycle.

The idea of a repeatable pattern of investor behavior is questionable because the environment and inputs are always different. Human behavior is relatively constant, though, so many use some version of the Cycle popularized by Justin Mamis in his 1999 book, The Nature of Risk.

Justin Mamis typical sentiment cycle

If we go back to 1928 and compare all periods that are similar to that 1990-1991 period, we can see the correlation we have to each part of the Cycle. When we do that, we get the following estimates for where we are in the Cycle:

  1. Enthusiasm: +0.93
  2. Returning Confidence: +0.77
  3. Discouragement: -0.69
  4. Panic: -0.80

The correlations range from -1.0 (perfect opposite) to +1.0 (perfect symmetry). Based on that, there is a strong probability that we're in the Enthusiasm phase. Last September, the correlations suggested we were moving into the Returning Confidence phase, a good sign. It stayed there for a while, then moved into Enthusiasm near the end of last year.

Correlation to typical sentiment cycle

So, it has been more than six months, 140 days to be exact, that the price pattern of the S&P 500 has had at least a +0.60 correlation to both Returning Confidence and Enthusiasm, while also showing at least a -0.40 correlation to Discouragement and Panic.

That has moved us into the top 15 stretches of time with this kind of confidence among investors.

Stat Box

Nearly 93% of stocks in the S&P BSE Sensex Index of Indian stocks have climbed above their 50-day moving averages. When the index has seen similar internal thrusts, it rallied over the next 3 months after 19 out of 22 signals.


What else we're looking at

  • Full returns after investors showed at least Returning Confidence and not Discouragement for 140 days
  • A worrisome - and little known - sign of inflation, and what it means for the Dow Industrials
  • Indian stocks are showing a medium-term internal thrust

The post titled Where Are We in the Typical Sentiment Cycle? was originally published as on SentimenTrader.com on 2021-06-03.

At SentimenTrader.com, our service is not focused on market timing per se, but rather risk management. That may be a distinction without a difference, but it's how we approach the markets. We study signs that suggest it is time to raise or lower market exposure as a function of risk relative to probable reward. It is all about risk-adjusted expectations given existing evidence. Learn more about our service , research, models and indicators.


Follow us on Twitter for up to the minute analysis of market action.


Not ready to signup up for a free trial yet?

Signup for our Daily Lite email to receive highlights of our daily report, research and studies.


Follow us on Twitter:

Subscribe to our Youtube Channel:


RSS Feed

Subscribe to the Blog RSS feed

Tags