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Investor Sentiment vs. Long-Term Breakouts: Which Market Indicator Should You Believe Now?

It’s been years since there were this many long-term stock breakouts. But investor sentiment is a concern. Which indicator should you trust?

Growth Stock Red Up Arrow

It’s been a great eight months since the pandemic low in March, and for the market as a whole, November was a barnburner, especially for the broader indexes. The Russell 2000 small-cap index, for instance, ripped higher by a ridiculous 18% last month!

Short-term, there are some signs that things are hot and heavy, namely investor sentiment (see below), but what’s impressive is that for the first time since early 2017 we’re seeing a ton of longer-term (one- to five-year) breakouts as we run through our screens—it bodes well that some major advances could just be getting underway in a variety of stocks and sectors.

The biggest “sector” of all might be small- and mid-cap stocks. Indeed, the tracking ETFs for the S&P 400 Midcap (MDY) and Russell 2000 (IWM) both hit all-time highs last month after 26 months in the wilderness!

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In the growth arena, we actually own some of the relatively recent long-term breakouts—Uber (UBER) just got going from a 17-month zone, Roku’s (ROKU) year-long base resolved to the upside in September and recent addition Halozyme (HALO) decisively got going from a five-year rest a few weeks back.

But it goes far beyond leading growth titles. Applied Materials (AMAT), the giant chip equipment firm, just came out of a three-year base last month. Rail firm Norfolk Southern (NSC) came out of an 18-month rest. Timken (TKR), a maker of engineered bearings, belts and chains, blasted out of a 28-month consolidation. And marijuana REIT outfit Innovative Industrial Properties (IIPR) popped out of a big 16-month launching pad.

Investor Sentiment Indicators are Speaking

Thus, whether it’s core evidence (trends are up), unusual strength or the myriad longer-term breakouts mentioned above, the big-picture market outlook remains very bullish—we think the market will surprise on the upside in the months ahead.

However, there is one fly in the ointment, and that’s sentiment: Whereas most investors were panicked in March and still fearful throughout the summer and early fall, the recent positive news (33% GDP growth, vaccine coming this month, less uncertainty with the election mostly over) has caused many to become quite giddy.

In terms of money flows, our Real Money Index (see next page), which looks at the five-week sum of money moving into (or out of) equity mutual funds and ETFs, is at its highest level since May 2018. The NAAIM Exposure Index, which measures the positioning of many big investors, is north of 100%, telling you that (on average) members are more than fully invested!

As for surveys, it’s a similar story—the four-week average of net bullishness among AAII members is the highest since January 2018. Meanwhile the 15-day equity put-call ratio is near multi-year lows, telling you few are yearning for much protection. We could go on.

Of course, as we always remind people, investor sentiment is a secondary piece of evidence, especially as there are many ways to measure it. For instance, in Cabot Options Trader, Jacob Mintz (sharpest option fellow I know) measures big (smart) money options activity, and that’s actually been slightly bullish for the market of late. Plus, even if there is extremely bullish sentiment, the timing of the next pothole is unknown. That’s why we don’t use sentiment signals to do any major buying or selling.

Still, these measures usually do a good job of telling you that risk is elevated—that’s no reason to get bearish, but it does tell us to continue picking our spots carefully.

And if you want some help picking your spots - and stocks - you can subscribe to my Cabot Growth Investor advisory, where my portfolio currently has an average return of 35%, all on stocks that were recommended within the last seven months.

To learn more, click here.

*Editor’s Note: This post was excerpted from this week’s issue of Cabot Growth Investor.


A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.