This chart is the simplest depiction of the different stages of a market rally or decline in terms of sentiment.

It is extremely useful to apply to market environments to help make forward-thinking projections.

The reasoning is simple. Every investor goes through these stages in terms of market sentiment. They’re hardwired.

Simply put, sentiment is psychology. Knowing what the psychological stages of an investor’s mind are as you go through the market is invaluable.

A year ago, we were feeling downright euphoric. Nothing could go wrong with the market. I could close my eyes, pick a ticker, and you’d be printing money in a matter of weeks.

Psychologically, that’s what a bubble is. You want to buy everything because you know it’s not going to go down in price.

And when that bubble pops, our natural inclination is disbelief. Things aren’t going to keep going down, we tell ourselves.

This is the most dangerous stage of all, as people latch onto anything they can despite an utter lack of logic – just so they can say, “Things are going to be OK.”

Downgrades? That’s OK, that analyst didn’t know what they were doing.

Firings? That’s OK, it’s cost-cutting.

CEOs stepping out and moving on? Are banks telling you a recession is coming?

That’s OK, we’re going to have a soft landing.

So, that brings us to where we currently stand. I erroneously thought we had reached the acceptance phase a couple of months ago – we hadn’t.

People weren’t quite ready to admit that we were in a bear market and it was time to sell.

Well, 12 months after that euphoric peak, we still haven’t seen that transition fully.

There’s still so much cash on the market moving around from sector to sector.

The simple fact that people are still trading stocks, rather than locking up stable, smaller returns like 4% CDs, tells you that we aren’t at acceptance yet.

For what it’s worth, I expect us to hit that acceptance phase in the first quarter of 2023.

The reasoning for that is because there’s something we haven’t had to deal with that’s coming to fruition right before our eyes…

JP Morgan, Bank of America, and CitiGroup are all considering bonus cuts. Goldman Sachs warned of job cuts. 

The CEOs are trying to hint that they’re not getting deals done. These companies are pre-announcing poor revenue numbers. 

We’ve seen worries about earnings in the past couple of quarters, and they haven’t come to fruition. 

Well, reading between the lines, this next quarter will be the first challenging quarter that I see coming.

So, this is how you’re going to use that sentiment knowledge above to make trades here as we get into the approaching earnings season…

Because, remember, market sentiment is a contrarian indicator. If you want to get ahead of the market – which is every trader’s goal – you should trade against sentiment. 

So, about those banks…

This is the SPDR S&P Bank ETF (KBE). I said last week that banks are historically the leader when you start running into true recessionary conditions.

It’s sitting at about $46 – and that’s important because that’s a critical level.

That $46 level is where we landed after it broke its 50-day moving average (MA50) back on December 6. It’s a technical pivot point. But on top of that, we’ve got the MA20 and MA200 hanging right overhead like the hammer of Thor, waiting to break as well.

We fell from recent highs at a rapid pace – in a matter of three days. And it was the bottom Bollinger Band that really held it at $46. Seeing as how it’s not oversold right now, there’s an opportunity for KBE to break lower and break below the bottom Bollinger Band.

If it breaks the $46 mark, I expect it to fall all the way down to $42.

Now, the last time I saw the true despair move on the banks was in February 2009. That’s the last time people hated bank stocks.

If you recall, that’s when Congress came out and said, “We need to stop this. You can’t short bank stocks any longer.”

That’s despair, when nobody wants to buy bank stocks and everybody wants to short them. We are just not there yet.

Other than the KBE, there are two other sectors I’m watching for this.

First, you’ve got the SPDR S&P Retail ETF (XRT).

We’re going to get some great data on Thursday in the form of retail sales results. In the wake of Black Friday – traditionally the peak in terms of retail market sentiment – a lot of big-name retail stocks have just been hanging there, waiting for a shoe to drop.

For example, here’s American Eagle Outfitter (AEO)…

We’ll see if it’s a smelly shoe that drops on Thursday but watch out, there are tons of retailers showing patterns like that.

I’m going to use that sentiment, the technicals, and the data from Thursday to come up with some howitzer trades for my members.

But the other sector I’m watching alongside XRT is none other than the SPDR S&P Homebuilders ETF (XHB).

I read the other day lumber prices are at their lowest since June 2020 and are down 78% from their insane May 2021 peaks.

And now, the XHB chart looks like this…

As you can see, it just broke below its 200-day moving average.

Plus, those constricting Bollinger Bands tell me that there’s going to be some volatility on its way in this sector. 

With that break of the MA200 adding selling pressure, a break below the bottom Bollinger Band would only intensify that negative movement.

Sentiment has been optimistic on the homebuilders, as if they could do no wrong. But once again, this is a contrarian indicator, so we’re trading against sentiment.

Besides, the fundamentals are very poor, and the technicals are getting ready to worsen.

If the sentiment’s still optimistic and the technicals are starting to waver, that’s when you get the kind of moves that you want to trade for big swings.

Suffice to say, you’re going to want to follow this one alongside me.

I usually like trading Fed announcements and comments, but this one’s going to be a little different.

The real trades are going to be Thursday, Friday, Monday, Tuesday, and Wednesday.

Stick with me and we’ll make the most out of it.


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