Watching Emotions on Wall Street

Investors have a habit of getting excited about something just as it is peaking. They also have a habit of falling out of love, just as something is bottoming. As a contrarian, I like to pay attention to these emotions.

You might recall just a week or so ago everyone got excited over the Japanese market, the Nikkei 225, as it soared up to 31500. That was because it was the highest it had been since it peaked way back during the first week of 1990 (at 40000). But no one cared or noticed it when it broke out in April at 28500, did they? No one fussed. But at 31500, it’s, Hey count me in!

Here’s the thing to pay attention to: that base measured right to 31000-31500. And the Daily Sentiment Indicator (DSI) got to the high 80s. Since that newfound love, the Nikkei is down just 2%, but have you heard anything about it since then? Of course you haven’t. Because it’s not going up anymore.

And do you remember all the love for oil exactly a year ago? I know you do, because I wrote about it right here. Oil was at $120 and the cries for $200 were loud and strong. The Daily Sentiment Index was also over 90. That’s like a bell ringer, isn’t it?

Now crude oil is under $70 and no fewer than three different former oil bulls have turned bearish on it. I get it, energy acts awful, the stocks and the commodities. But to love it at $120 and think it is going to $200 and now think $50 is in the cards is quite a turnaround in your view is it not?

What I can tell you is that the DSI for crude oil is now 17, so it won’t take much to get this to an extreme.

I thought of this on Wednesday as I was playing my daily Wordle game. After plugging in my first word the only two letters that were right — but in the wrong spot — were “A” and “I”. My brain immediately thought, AI is everywhere, I can’t get away from it.

Is this an extreme in AI? I can’t say, because I don’t have a specific sentiment indicator for it but I can tell you that it feels like the chatter has gotten very extreme in the last few days. If you think of volume in a stock as a form of sentiment, in that they are screaming too loudly, you can see on the chart of C3ai (AI)  each time volume has gotten extreme the stock has pulled back.

Basically, we’ve come full circle from last June when no one wanted tech, but everyone wanted energy. Now they all want tech and no one wants energy. Let’s see if turning the calendar to a new month changes that.