Trader sentiment back in the clouds

So, I am having an acute deja vu all over again. For traders with short memories – and there are a great many – as far back as last May, trader sentiment was also elevated. And we know how the market resolved that little extreme – with the Dow plunging around 1,000 pips off the 22 May top in just one month.

This date marks the all-time FTSE high, of course.

But the US markets, especially the S&P and the risk-on Nasdaq have zoomed into the stratosphere accompanied by a DSI reading this week of 84% bulls. While not as bubbly as the 92% bullish reading at the 22 May top, it is getting there, and all it would take is another leg up to lure the last remaining bears to throw in the towel and join the herd.

We are getting close to mania territory, and as an antidote to that, near the June low in the Dow, DSI had only 30% bulls. My, how fickle trader are!

But although not a trade timing indicator, the DSI (and others) are flashing a big yellow warning light to the bulls.

And when the market does break, all those bulls will be wondering whether to unload or hold. They have had a fantastic run – and many are getting cocky. Just read some of the articles on seekingalpha.com to get a flavour of the extreme bullishness. Naturally, those holding equities will be the most bullish, as their judgment has been validated. Many will feel like investment geniuses.

Let’s see how they do in bear market.

US DOLLAR

Is trying to make a base at current levels. The EUR/USD is looking peaky: