Wednesday, November 19, 2008

Where Are We In The Investor Sentiment Cycle?

It is often said that the market is driven by fear and greed. These emotional influences tend to create the peaks and valleys that are all to typical in the stock market cycle. At the end of the day though, fundamental stock and economic factors will determine the long run performance of the market. However, in these stress periods, it is important to try and determine where the investor is emotionally in terms of market sentiment.

In a recent comment by Charles Kirk of The Kirk Report, he felt the market has entered the discouragement phase. As the below chart notes, the discouragement phase comes after the capitulation phase and begins the market bottoming process.

Investor Sentiment Cycle ChartSource: Invivo Analytics

The Invivo Analytics site contains a full discussion of The Investor Sentiment Cycle.

As the below chart of the weekly performance of the S&P 500 Index notes, most of this years loss has occurred in the last eight weeks.

(click for larger image)

S&P 500 Index chart November 19, 2008
Could this eight week decline of nearly 35% be an indication the market has gone through the panic phase? If so, maybe the market goes through a bottoming process (discouragement phase) over the next several weeks. It would certainly be nice to see this play out and have the market start climbing that "wall of worry".

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