I believe that aside from liquidity, sentiment is a key driver of stock markets. A few posts earlier, I wrote about the the three distinct phases of a bear market. I found a well written article which describes the idea that I probably stumbled upon while reading finance literature. It says that the denial, concern and capitulation are the three stages of a bear market and it defines capitulation as:
"At this point the market may rally again as many observers feel that the decline has ended and that a new bull market has begun. This rally, also characterized by weak breadth and low volume, subsequently fails and heads down. At this point the majority becomes exceedingly bearish and throws in the towel, fearful of further declines and the potential disappearance of their assets. This is the capitulation phase, when stocks are sold on fear and emotion rather than on rational analysis. It is at that point that the market is finally ready to make an important bottom."
I have called 21 January 2016 a the bottom of the market in my recent post. Some have told me that it is too early to call or too risky to time the market. However, I believe that we capitulated. My own capitulation came on the last week of January when I received news from my company regarding the state of affairs for 2016. I believe that we are entering a recovery phase that started with somewhat a bang. A bull market does not announce itself but this is just the initial recovery stage. Interestingly, I came across a blog post which said that when the market is at the lowest and thus the best time for investment, it is also a time when you may lack the ability to invest because you might have lost your job or not received a good bonus!
I am writing this in response to an article that talked about people's fears of missing out or FOMO. I initially thought it meant the fed's open market operation. As long as there is FOMO, I think the market will be on the path to recovery, speed notwithstanding. The bull market needs to climb the proverbial wall of worry. Other walls of worry I expect the market to climb would be the American Presidential elections. Suddenly, concerns about ISIS has taken a back seat to the race to the White House.
If you do have any way of measuring sentiment, do share. It will be useful in refining my sense of an already abstract indicator. My next major alert is when the market starts to get a little too frothy.