A Good Test of Actual Sentiment

With stocks taking a breather this morning and finally seeing some light profit-taking as the small caps initially flinched at the idea of taking over the leadership reigns, we should now gain excellent insight into what the actual sentiment is of market players. 

Specifically, in this day and age with a plethora of easily-digestible sentiment surveys, a surge in anecdotal evidence both in the real-world and social media, not to mention plenty taking their cues from the VIX (which has only been around a few decades and not a few centuries), it can be easy to succumb to confirmation bias when it comes to assessing current market sentiment as being a contrarian indicator, for example. 

Into this latest push to new all-time highs in the S&P and Dow, for example, a faction of market pundits and players observed "blow-off top euphoria," on light volume, while others are opining about the vast amount of fund managers who were caught leaning short or flat after Brexit and now need to chase performance into the back half of 2016. 

So, as you can see, it is easy to pick your bias. 

In reality, the more objective strategy is likely to continually assess the progress of leadership sectors and stocks in the market, all the while paying close attention to see if the participation broadens out to other sectors, to boot. If sentiment becomes very cautious/bearish into a market pullback here, it likely points to the pain trade still being higher and the breakout having legs. 

I will update those leadership sectors and stocks for Members in my Midday Video, coming up. 

One last point regarding volume: Perhaps the market will not top out until volume actually surges to the upside, especially if the cash-heavy-investors bull argument is correct. This argument obviously stands in stark contrast to the notion that a rally on light volume is somehow invalid.  

Again, there are two sides to every sentiment argument, it seems. So perhaps the ultimate contrarian play these days is simply focusing on the price action of stocks and the message of the market in lieu of blending half a dozen sentiment indicators and overlaying it with an analog.