Those arguing excessive bullish sentiment towards urges caution are early. Weighted and normalized sentiment towards stocks (WA) which has risen to 0.90 through 09/18 still trades below bearish concentration (chart 1). Bearish concentration, readings above 1.96, define growing imbalances between supply and demand, or mismatches between majority and minority holders of stocks that often foreshadows 'vulnerability' of price over the short-term. This vulnerability often leads short-term trend reversals.
The oscillation of sentiment, currently cycling towards bearish concentration, suggests plenty of euphoria-based headlines in the coming weeks.
Today's well-publicized flash crashes are driven by supply/demand imbalances. The media often explains them as manipulation or harebrained conspiracies that have included 'fat-finger' theories. These 'sexy', click-generating explanations are easier to sell than mathematical/cyclical explanations such as weeks of euphoria towards stocks created a large supply/demand imbalance that when unwound created a sharp decline in price.
Weighed and normalize survey data, equity and volatility analysis, and put/call money flows gauge direction and magnitude of sentiment. The latter two, based on the movement of leverage - the following of money rather than opinion, provide better interpretations.
