New Energy Weekly Update – July 8, 2022
The Market Feels Bad Right Now – But It Could Actually Be Great for Investors
My grandmother had a ring that changed color. It was a large, oval stone set in a gold gilt ring. It usually swirled with green and blue. It was her “mood ring”. She kept it in a dish on her vanity. And as kids do, I used to play with it whenever I spent the night. I was fascinated by the way it could change color. I would run warm water over it and watch it turn yellow and red.
The mood ring craze hit in 1975. According to Atlas Obscura, people bought 40 million rings in just three months. The marketing assigned emotional states to the ring’s colors:
- Dark Blue – Very Happy. Love, Passion, Romance
- Blue – Relaxed, Calm, Loveable
- Green – Average. Not Under Stress.
- Amber – Nervous, Unsettled, Mixed Emotions.
- Gray – Anxious, Strained
- Black – Tense, Nervous, Harassed, Over-worked.
Of course, the colors were all based on the temperature of the ring, not necessarily the wearer’s mood. But the fact remains that the human body’s temperature can change based its moods. And by tracking those changes, we can make changes to help our bodies out.
I hadn’t thought of that ring in decades, until I began working in financial research in 2005.
But it turns out that sentiment – a fancier term for mood – plays a huge role in the stock market. How investors “feel” on any given day, drives their actions. Even the computer algorithms that do the bulk of the daily trading are built to predict sentiment swings.
And if we can track those feelings, we can adjust our investment strategy to take advantage.
Since I learned about this phenomenon, I’ve spent thousands of dollars on sentiment indicators and trackers. I still subscribe to Jason Goepfert’s SentimenTrader.com. He tracks many sentiment indicators that create an effective mood ring for the market.
The trick is timing. About 90%-plus of the time, sentiment doesn’t help investors like us. Some short-term traders use it daily. But for those of us who buy and hold stocks for the long-term, it’s not great… except for times like today.
When the market gets extreme – bullish or bearish – sentiment is critical. And we are in one of those periods right now. The chart below is from Jason’s July 7 SentimentEdge Report. It’s titled: “The Panic Button is persistently perky.”
And while I usually hate alliterative headlines, this one makes a good point. His “Panic Button” uses four critical indicators to track the mood of the credit market. When the Panic Button is high, it means there’s a lot of fear about the economy and the future. It also means stock prices are high and could fall.
Right now, the Panic Button is teetering on the brink. Here’s what Jason said about the latest reading:
With some spreads continuing to widen, it’s a good time to revisit the Panic Button. Surprisingly, it still hasn’t jumped above 1.5, which is when things tend to get hairy. The highest it got was 1.28 on June 30. Still, it has been relatively high for weeks, so the 20-day average has now climbed above 1.0 for the first time in two years.
The last time it spiked was during the pandemic. Right now, we sit on a knife’s edge. A push one way and we could see a return of normality. A nudge the other, and we could see another big leg down for stocks.
The good news is that SentimenTrader’s team did a deep dive into periods like the one we are in now. Since 1954, there have been eight times when the Panic Button went above 1 after having stayed below it for two years. And the S&P 500 went up over the following two to three months – every time.
Three months after this point, the S&P 500 had risen 6.7% on average. That’s amazing.
One year after this point, the S&P 500 had risen 23.4% on average. And out of those eight instances, it only declined once, in 2007-2008.
That’s good news from the market mood ring.
Good Investing,
Matt Badiali
