Wall Street Craps – 2012 Global Ebook Finance Award-Winner

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading has been in the “Extreme Greed” zone for several days now. It has even gone to the far extreme by posting a reading of 90 which probably marks an “internal top” or point of maximum upside momentum.

While this isn’t the only indicator of the market’s condition, it has represented a reliable gauge of market sentiment in the past. When the market is “over-loved” like it is now, it matches both the present overbought (in terms of price action) and overvalued (fundamental) condition.

Together, these 3 gauges confirm that this is highly likely the area of an important top and certainly not a time to become more bullish and hold large bets for more upside appreciation. That doesn’t mean that they market can’t go any higher in terms of price, but it does suggest that it won’t be going up for very much longer. If there is a time to move to the sidelines, this would be one of those.

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading is once again back in the “Extreme Greed” range after being in the “Extreme Fear” zone only a few weeks ago. At the beginning of this week, most of the internal indicators were showing “overbought” conditions. Plus, the market indices are pushing against resistance levels at the top of the price ranges.

All of these point to a time when it’s too late to buy and most likely a good time to sell or lighten up. And while this Fear/Greed Index is showing “Extreme Greed,” it can still move closer to the 90-95 range before exhausting itself to the upside.

Now is a time to start building up cash for the next buying opportunity when this indicator is back in the “Extreme Greed” area. That time is several weeks away.

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading is finally in the “Extreme Fear” range for the second day in a row at 17. This indicator is now suggesting that the general stock market is in a “buying opportunity” zone.

This is a minimum requirement for taking new positions in the general stock market. In the past, it is not unusual for market bottoms to occur when this index is under 10. But overall, the market is close to a bottom and it wouldn’t be such a bad idea to start taking positions on any further weakness even though your “palms are sweaty.”

But in times and opportunities like this, money management strategies are the key to success. In my book, Wall Street Craps: How to Play Today’s Hot & Cold Markets for Fast Money With Less Risk, I write about dividing your investing capital into “chips” or even blocks of money.

For example, if you have $100, divide this amount into 20 $5 chips. Your first bet might be $5 or $10 or 5% or 10% of your investing capital. So the present situation would be one where you make a first bet. This means that the present buying opportunity should only be 5%-10% of your investing or trading capital. This is because you may be a little early at this time and in steep market drops being early can be costly and dangerous.

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading is in the “Greed” range at 31. This indicator is now suggesting that the general stock market is approaching a buying opportunity. That signal will be triggered by a reading below 25 in the “Extreme Fear” zone.

Thus as far as sentiment goes, an important signal may come as early as Friday or Monday. This would be a “buy the dip” strategy which one day will prove to be wrong. But this market has been really resilient to declines and until proven otherwise, I’d expect another rally to new highs to occur when this current decline ends.

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading is in the “Extreme Greed” range at 81. This indicator is now suggesting that the general stock market is in the danger zone. This means that it’s not the time to buy in order to go long equities. Instead, it’s a probably best to lightened up on extended positions and reduce your risk.

And while the market may correct, bottom, and return to this same price level, it’s usually prudent to begin taking your gains especially when the sentiment is overextended like it is now. When the technicals and the sentiment confirm each other, it’s smart to anticipate an immediate trend change. That doesn’t necessarily mean going short because that in itself is a whole different game to play for most.

Note: A chapter in my book, Wall Street Craps: How to Play Today’s Hot & Cold Stock Market for Fast Money With Less Risk, deals with the unexpected unique challenges of playing the short vs. the traditional long game of stock market investing & the dangers of leveraged short Exchange-Traded Funds.

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading is in the “Greed” range at 64. This indicator leaves room for the market to rally further until it reaches unsafe territory in the “Extreme Greed” area.

A few weeks ago, this indicator gave a one-day reading of 25 in the “Extreme Fear” range. That proved to be the bottom in retrospect as this bull market continues to power through. With that in mind, it’s probably wise to avoid any short positions and await the next oversold reading in the breadth oscillators or an “Extreme Fear” reading below 26 in the Fear/Greed Sentiment Index in order to take additional long positions.

But at this point, taking profits would not be such an unwise thing to do in anticipation of the next sharp downdraft with seems likely to occur after an “obvious” piece of good public news (like the passing of the new health act).

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading is in the neutral range today despite being at the higher part of the trading range. This could have multiple interpretations. For me, I see this as a potential buy signal after a relatively short period of price weakness. That weakness could translate into “Extreme Fear” in this indicator without too much damage to the present price structure. If we should get a reading in the “Extreme Fear” area accompanied by “oversold” reading in many breadth indicators, we could find another “dip” to ride the market up for another spectacular rally. Until proven otherwise, continue to look at “oversold” and “under-loved” conditions as opportunities to buy.

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading has finally moved into the “Extreme Fear” range this past week. But it is just touching that area and I would expect a reading under 20 in order to feel like it is truly registering “Extreme Fear.”

But this indicator is now saying that it’s time to start thinking about accumulating pilot positions for the next rally. The challenge is that there hasn’t been much price erosion in the market since its March top. Hence, many positions are still well over their 200-day moving averages with plenty more room to correct.

I’d look at this indicator as simply a sign to start thinking about going long the general market and use other breadth indicators to fine-tune the timing. And many of the breadth indicator are starting to flash buy alerts as well. So a bottom is close at hand unless we rally quickly to lessen the downward pressure.

The “Fear/Greed Sentiment Index: What Emotion is Driving the Market Now?” reading has moved back into the “Extreme Greed” range this past week. This is one of the pre-conditions for an intermediate stock market top. The prudent thing to do would be to lightened up on any over-extended long positions on further strength in the market. There will be another time later on when stocks will be of greater value than is present right now. Remember that tops take longer time to form than bottoms, so you don’t have to sell right this minute. The main thing is to know that this is a golden opportunity to get a very good price for any stocks that you’ve purchased at lower prices. You can always buy back in at lower prices later on – “The Wall Street Casino will always be open.”

Note: I consider an “Extreme Greed” reading as over 80. This reading may occur several times in a “sell” area. In the present epic rally, I’d even expect readings closer to 95-100 before an actual downturn ensues.

Today’s  “Fear/Greed Sentiment Index” reading has moved from “Extreme Greed” to “Greed” as of this week. Any return to new highs by the Major Indices will most likely move the needle back into the “Extreme Greed” territory. However, this second return to “Extreme Greed” territory will most likely signal the final rally of this move. Expect the first weeks of January to be tricky and counter-intuitive.