THE DATA
The Panic/Euphoric model from SentmentTrader is sitting at historically extreme levels. The indicator is used to measure the change in sentiment over time. It swings from extreme optimism to extreme pessimism and has a strong relationship with market reactions once this indicator reaches extreme conditions.
Sentiment at extremes is often a contrarian indicator for the stock market.
This makes sense as human nature tends to extrapolate out current success and failure in perpetuity. This method of thinking is wrong.
"There's only one reason a share goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you've got to look for where the public is most frightened and pessimistic." JOHN TEMPLETON
Since 1988, this indicator has reached these levels 11 times. 10 of those 11 instances were met with positive market returns 12 months later. The average return was 25% and the max loss was -9%.
If history is a guide, then these levels of extremes offer an attractive risk reward.
Disclaimer: Not a recommendation to purchase or sell any securities mentioned. Investing involves risk.