In a survey of Bank of America Merrill Lynch, 58 percent of global money managers think the 9-year bull market run is in its last leg and the price will soar high for the last time as we move forward in 2018 before entering the bear territory in 2019. In fact, in India, several polls suggest that Nifty may gain 6 percent by the end of December this year.
This alone says a lot about why the market sentiment is high these days. What is further adding to this climate is the dramatic market correction we saw in February. The general perception among investors and traders is that the market, after price correction, is back on track and that there are very few things that can go wrong here. So, many have a sunny outlook of the stock market today.
And this is NOT a good sign even if you look at it holistically and historically.
A report by Matthew Frankel on Motley Fool tells that according to “Buffet indicator”, a market crash could be coming ahead. He writes, “the fact is that the Buffett Indicator is at its highest point in history -- meaning that stocks have never been valued as high as they are now in terms of market cap to GDP. While this indicator doesn't necessarily mean that the tides will turn anytime in the near future, it may be a smart idea to start thinking a little defensively.”
While this report cites this unique metric and asks market players to be cautious, on a personal level, I like to ask people to look at historical data. Every time in the past, a high market sentiment – which triggers a cycle of better returns, more investment/trades – is always followed by a big slump. And it isn’t just a big correction. It usually is a knell of the market entering in the bear territory.
Besides, for a couple of years now, an imminent market crash is well anticipated. A decent performing market for a sustainable period of 9 years has to stop somewhere and take a U-turn. And now is perhaps that time when that U-turn is going to happen—in about t a few months from now. The market sentiment is high; meaning, the scene is now over-burdened by new, rookie, money-focused investors/traders. Their inability to think sane and perform better would shake the market into instability. FUD will further sway that imbalance, pushing the price down the cliff.
In short, a consistent performing, good-performing market – that has recently tackled a critical correction very well – is the reason behind the bullish sentiment. However, if you’re a pro player who knows how to do technical analysis and measure the key metrics, you would know a high market sentiment market doesn’t sound like something very good.