Sideways trading range markets have their own unique characteristics – both technically and psychologically. More than any other emotion trading ranges tend to elicit frustration from investors. Nothing, after all, is more irritating to an investor than having to sit through long periods where stocks are making little or no progress. The longer the trading range persists, the more frustrated and impatient investors tend to become.
If the trading range is established in the midst of a longer-term uptrend it’s not uncommon for investor sentiment to remain stubbornly bullish for an extended period. Investors have become so conditioned to rising stock prices that it often takes several months of a grinding lateral trend before they finally lose their enthusiasm. It’s when investors finally become more pessimistic on equities that the market commonly breaks out from the trading range. In other words, investors normally have to be “head faked” before the market can proceed to a higher level.
That pattern appears to be playing out in the U.S. broad market. After spending the better part of the last six months in a sideways trend, the NYSE Composite Index (NYA) appears to finally be on the brink of a breakout to a new high this spring. What makes this even more intriguing is the current backdrop of investor sentiment….
Market psychology isn’t as important as the market’s internal momentum and overall technical backdrop, yet it can still yield clues as the market’s next directional move. And the current readings of both the “smart money” and “dumb money” sentiment indicators reflect an improving psychological backdrop. Once the short-term internal momentum indicators improve this should prove quite handy in providing the market with enough fuel for an extended rally later this spring. [Excerpted from the Mar. 23 Momentum Strategies Report]