Sentiment is a very important influence in markets. When positive, as it has been since March, traders tend to ‘look through’ today’s problems to a brighter future. But at some point, reality needs to confirm this optimism.
The IeC Boom/Gloom Index (blue column) aims to measure these changes in sentiment. It correctly forecast March’s turning point, since when financial/commodity markets have risen around the world. But last month’s 40% decline suggests this bear market rally may be ending.
The focus of the rally was the belief in ‘Green Shoots’ (green line) of recovery. This began to rise in early 2009, and took off in March, when it rose 4-fold, before peaking in June at 162. Q3 saw it begin to slip, and October’s new reading shows it back at 37.
Back in August, the blog suggested that all major downturns go through 3 main phases – “sharp down, reflexive rebound, a drawn-out fundamental downtrend“. Today’s new Boom/Gloom Index suggests we are now starting to move into the 3rd phase. A sharp rise in the “Frugal Index” (red line) by year-end would confirm this is underway.