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Price-earnings ratios and dividend yields are showing that the stock market is expensive. And my big-picture economic indicators are signaling high recession risks. My liquidity indicators are confirming this recessionary scenario … they’re telling us that stocks are probably on the verge of plunging into a bear market.
Moreover, most stock market sentiment indicators are high enough to allow for major, stock market losses. And one of them, a German sentiment index, grabbed my attention.
The Sentix Sentiment Indicator measures the six-month expectations of European institutional and individual investors. It’s calculated with the following formula:
And it’s revealing that …
European Investors Have
Turned Very Bullish
As you can see on the chart below the Sentix took a huge jump recently. It actually reached the highest reading since it was invented in 2001, which means according to this indicator European stock investors have never been more bullish.
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The most amazing aspect of this reading is the fact that stock markets have gone nowhere for nearly 12 months!
Major U.S. and the European indexes hit their highs of the year in April. And they’re trapped in a huge trading range, which can easily turn out to be a significant top.
Investors normally get bullish as stock prices rise. So it’s an important warning signal when a leading sentiment indicator, like the Sentix, reaches bullish extremes while prices are flat.
Currency Markets Are Also Showing
Extreme Sentiment Readings
Everything in the financial markets seems to depend on the fate of the U.S. dollar. As long as the dollar keeps falling, the stock market manages to hold together. It seems to be the same old “risk trade” so prevalent for many months.
But the currency markets are also flashing extreme sentiment readings. Just six months ago the euro was said to be totally doomed. The percentage of euro bulls fell to low single-digit readings.
Now, after a nice rally from below 1.20 to around 1.40 the number of euro bears has declined to low single-digits. It looks like we have come full circle here, and the euro rally is about to end.
Here, too, an amazing thing has happened …
The following EUR/USD chart shows that the euro is more than 10 cents below its November 2009 interim high, which was nearly 10 cents below the summer 2008 high.
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So in the somewhat bigger picture the euro is still in a downward trend to the dollar. Yet bullish sentiment has reached record levels!
Obviously, emotions in the stock and the currency markets are running high right now. Sentiment extremes are typical signs of very lopsided trades. And usually a trend reversal is right around the corner.
Best wishes,
Claus
