Investor sentiment has now fallen prey to the stock-market equivalent of cardiac arrest.
That’s understandable. Popular stocks like Amazon.com AMZN, +4.16%[1] Apple AAPL, +2.94%[2] and Facebook FB, +0.25%[3] are all in bear-market territory. So are broad sector indexes like the Vanguard Energy exchange-traded fund VDE, +1.05%[4] the SPDR S&P Biotech ETF XBI, +2.15%[5] and SPDR S&P Homebuilders ETF XHB, +1.49%[6]
Sentiment is now so dead that it suggests the next leg of the stock market is up, in the contrarian sense.
Consider the ratio of open interest in puts (a negative bet) to calls (a more hopeful position). This ratio has spiked to levels frequently followed by rallies, says Doug Ramsey, chief investment officer of The Leuthold Group. “That would support my call for a possible bounce into year-end,” he says.
Insiders, the people with the front-row seats on business confirm they expect the next major move is up. Insiders are bullish overall with purchases outweighing sales — an unusual tilt for them. They usually sell more stock than they buy.
In analysis I do of insider activity for my stock newsletter Brush Up on Stocks[7], I’ve noticed that insiders are now particularly bullish in cyclical sectors like auto parts, home building and related retailers, real estate, chemicals and energy. This makes sense. Cyclical stocks are among those that have been hit the hardest. So they’re likely to rebound the most in a market reversal.
Of course for markets to firm up again, something is going to have to jolt investor sentiment out of cardiac arrest and bring it back to life. Here are the two chest paddles that will soon provide the shocks that investor sentiment needs.
Right chest paddle: The Fed backs off
Throughout this recovery since 2009 every time the Federal Reserve has started to pull away the comforter...