Chart Advisor: Pessimism Peak?

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Monday, 13h February, 2023

1/ It’s Time to Fade the Bears

2/ Well-Deserved Digestion

3/ Truckers Take the High Road

4/ Are Beans About to Run?

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ It’s Time to Fade the Bears

We use sentiment data as a contrarian indicator. Yet while optimism begins to increase, the more important point is that it’s turning away from levels of extreme pessimism.

When we look at weekly survey results from the American Association of Individual Investors (AAII)bears have outnumbered bulls for 98% of the weeks over the trailing twelve months. That’s the longest stretch for the bears in over thirty years. 

Source: Data provided by All Star Charts

Any increase in the share of bulls at this point would be a positive development for stocks, as extreme pessimism begins to unwind.

Inflection points in sentiment such as this often support sustained rallies for the stock market. Just notice how key market lows over the years coincide with peaks in this indicator. 

As such, the contrarian move today suggests fading the bears, not the bulls. It appears the unwind could already be underway, as last week was the first week of bulls outnumbering bears after 44 consecutive weeks of the opposite.

2/ Well-Deserved Digestion

At last Friday’s lows, Cathie Wood’s flagship growth fund, the Ark Innovation ETF (ARKK), was in about a 15% drawdown from just over a week of selling pressure. While this sounds like a rough selloff, when we zoom out, there is nothing out of the ordinary about it.

ARKK rallied roughly 50% from late December to its highs in early February. Today, buyers showed up and halted the corrective action from last week at a logical level. 

Source: All Star Charts, with data provided by Optuma

Here’s ARKK shown bouncing off the 38.2% retracement level of its recent advance. This key Fibonacci number is the first zone of potential support we would expect to come into play following January’s rally. So far, it is doing just that.

Another positive development from the recent price action is momentum hit overbought for the first time since the summer of 2021. This confirms the new multi-month highs from a few weeks ago and indicates buyers are becoming more aggressive.  

3/ Truckers Take the High Road

With participation expanding across equity markets, a growing list of sectors and industry groups stand out as potential future leaders.

When we look within industrials, one group that stands out is truckers, as they continue to outperform their peers and make new highs on a relative basis.

Source: All Star Charts, with data provided by Optuma

Last month, the Dow Jones Trucking Index burst higher from a 16-month base versus the S&P 500, achieving new all-time highs in the process. This is just the latest procyclical industry group to show impressive relative strength. We’re seeing similar action from semiconductors, homebuilders, and capital markets, just to name a few.

As long as this breakout sticks, this group of stocks could outperform over longer timeframes. 

4/ Are Beans About to Run?

Grain markets are starting to heat up as harvest time approaches, and soybean futures have our attention.

Check out the big multi-month base on the daily chart:

Source: All Star Charts, with data provided by Optuma

Breakouts from bottoming formations such as this can have huge upside potential. When an asset outperforms its alternatives, it tends to lead to sustained uptrends. 

Notice soybeans’ relative trend versus the broader commodity complex. It’s already breaking out a big base. As long as this relative trend remains intact, it could just be a matter of time before soybeans catch higher on absolute terms.

Originally posted 13th February, 2023

Disclosure: Investopedia

Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy.  While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.