As we mentioned last Wednesday, our Psychology Composite has fallen into the bottom 20% of its historical readings changing our gauge from P4 to P5, as you can see below.
There are two possible scenarios expected for Psychology.
The first one, which we believe is much more likely, is a market correction, which would serve to move the rating out of that bottom 20% zone into a more favorable reading...first into the P4 zone and then progressively better. The deeper the correction, the higher the "dumb" fear and the lower the "smart" fear would go, which would generate more progress in improving the Psychology Composite reading. Since this composite just nudged down under the lower 20% threshold, we actually expect any pause in market momentum to start this improvement. If it occurs now, the move back to P4 would occur almost instantly.
The second scenario is that the market would continue to move higher, and the Psychology Composite would gradually deteriorate until the more ominous P6 rating occurs. This would mean an increase in the euphoria by the historically "dumb" investor and a decrease in the optimism by the historically "smart" investor.
We would expect (and hope) that the first scenario plays out. This "hope" is based on our belief that with a very strong Monetary Composite, this bull market still has a long way to go before topping out.
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