Chart of the Day - Monday, December 18, 2023

Today's Chart of the Day was shared by Brian G. (@alphacharts). The recent face-melting rally has aroused animal spirits in a big way. Last week's AAII Sentiment Survey showed 51.3% of investors were bullish, while just 19.3% were bearish. Bulls outnumbered bears by the widest margin since April 2021. Sentiment can be an excellent contrarian indicator when it's at an extreme. However, extremes are rare by definition. Brian points out that smoothing the data with a moving average can help you identify when sentiment is extreme. Even once this slower sentiment indicator reaches an extreme, the market can continue higher for months while remaining frothy.