By Chris Weston, IG Markets
It generally pays to follow the money and respect the trend; however sometimes it can also be worth thinking like a contrarian, and getting ahead of the curve.
I will always trade with the trend as long as I can, unless I am seeing clear signs of exhaustion and divergence on the charts. Of course with this in mind you need price to confirm any reversal, but right now I am seeing a number of interesting indicators that suggests thinking like a contrarian.
Everyone is bullish
The weekly American investors bullish sentiment survey (released on Friday) at 46.28 is the highest reading since July and at levels thematic of pullbacks. The S&P 500 is in a strong uptrend and shorting the index has been the pain trade; however the index is now two standard deviations from its 20-day moving average, while also testing trend resistance drawn from 2010. The contrarians will be taking note of the overtly bullish sentiment at a time where markets are slightly overbought and approaching strong resistance.
Perhaps the fiscal 'agreement' has provided the necessary spring board for risk assets to appreciate, though it's interesting to see a comparison of the VIX (volatility index) relative to the S&P. In the last couple of years, whenever the VIX has traded above 21% and subsequently undergone a sharp decline, strong buying has then occurred in the equity market. Of course there is a strong element of 'climbing the wall of worry', but it's then a question of how long the move can be sustained. It also seems that when the VIX gets down to 12% (it's currently at 13%), the S&P 500 subsequently falls; again this could be another red flag for the contrarians.
If there are signs of an impending reversal then Asia is showing limited concern and markets are doing nicely today, with the Nikkei the outperformer with a gain of 0.8%. Japan's September trade deficit came out slightly higher than expected at