Studying sentiment surveys can help not only in short-term stockmarket timing decisions, but also in understanding the broader mood of the market.  Taking the longer term view that we use in this article really illustrates this point in that clear changes in regimes and climaxes in sentiment can be identified and utilized to enhance the broader macro view.

Over the past 2 years, and particularly in the last 12 months, there has been a major shift underway. I highlighted earlier this week how the Euphoriameter had moved into extreme Euphoria territory. Indeed, the 12-month smoothed bullish sentiment indicator below is one of the components in the Euphoriameter. Narrowing in on all 3 major components of the sentiment surveys, you can see clearly how bears have given up, and neutrals have capitulated. 

We are in a new phase of the market cycle, and this is usually the more dangerous stage. The part that offers both rapid and sizable returns, but the part that becomes increasingly vulnerable to shocks. As Warren Buffett says “we simply try to be fearful when others are greedy and greedy when others are fearful” (note with benefit that he says ‘try'…).

The key takeaways from this unique view on sentiment are:

-Bullishness is the dominant mood of the market right now.

-There has been a major capitulation from neutral sentiment to bullish sentiment and this particular trend may have room to run further.

-On a shorter time frame, both bullish and bearish sentiment are near all-time record extremes (high and low respectively).

-Such extremes in sentiment suggest the risk of a correction is rising.

1. Smoothed View: