Stop Watching Sentiment — All You Need is Price

Added: 2026-05-13

[00:00:00]Hi, this is Jason Kelly with The Kelly Letter. I want to talk to you today a little bit about sentiment. Too many people get distracted by it, thinking that they need to buy when sentiment is low and sell when sentiment is high, which is the right idea, but only in the sense that you want to buy low prices and sell high prices, and sentiment doesn't really give you much more information.

[00:00:21]In this video, I'll look at just over the past year how some some highs and lows in sentiment have simply coincided with highs and low in price, which you already knew just by watching the price line. And that's the only input we use in our signals, along with the schedule and some other rules, but we don't need any additional data input beyond price itself, which tells you basically everything.

[00:00:43]So, come along with me to look at a sentiment indicator and price of the S&P 500 of the the level rather on the chart of the S&P 500 over the last year to see why you really don't need to watch sentiment for your long-term investing plans. Here we go.

[00:00:59]Here we are at CNN Business. This is the Fear & Greed Index, which is an an an excellent an excellent index actually for monitoring the fear and greed or the sentiment of the market. You can see right now on the evening of after the market close on May 5th, 2026, we are operating at a greed-driven market right now. We're at 67 on the the index. We can look at that down here with this timeline.

[00:01:30]You can choose a overview rather. You can choose a timeline view, which is is this. It gives you the history going back a year, or the overview, which tells you on this dial where we are in the the cycle of the Fear & Greed Indicator. It goes from 0 in extreme fear to 100 extreme greed. And the the basic idea is you want to be selling stocks when investors are extremely greedy and buying stocks when they are extremely fearful.

[00:01:59]Uh coming down here, um you can see these are the the seven greed and fear indicators that they monitor. The first one is simply the S&P 500 and its 125-day moving average. As you move your your cursor along this line, you can see the S&P in blue and its its 125-day moving average in orange.

[00:02:18]And the right now, it's showing, scroll up a little, it's showing extreme greed uh simply because it's been going up so much here. You can see the the bottom at the end of March um as as the markets concluded that the worst of the Iran war was over, and then we had this this powerful rebound over the the past month, and that's why this is now called extreme greed. Stock price strength is related to that. This this measures net new 52-week highs and lows on the New York Stock Exchange. Um that that comes pretty close to mirroring the S&P 500 down down here at the the end of March, you can see that it was it was quite low, maybe a good time to buy.

[00:03:01]And up here it was quite high, and it's been rising during this this uh surge higher over the past month or so.

[00:03:08]Then we get breadth with the McClellan Volume Summation Index.

[00:03:12]Uh same thing. It goes down when price goes down, it goes up when price goes up, basically.

[00:03:17]Put and call options, similar. Um these are showing how investors are actually positioning their money based on where they think the market's going. Many investors consider this more reliable than say uh surveys of investors like what the AAII does, or just ask people, "Are you bullish or bearish?" Which can be useful, too, and many sentiment believers look at that. But the put-call ratio or PC ratio is considered a little more rational, I suppose, a little more hard evidence because it does measure where people have actually placed their money, what investors are betting on the market doing next rather than just saying how they feel about the market.

[00:03:56]And this tracks that. They use a CNN uses a 5-day average put-call ratio, and you can go along and see what it was for for each day over the last year. Um quite similar, got down low at the end of March as price was down low, uh shot up a lot higher, went went down low again on April 20th. So, this one's a little bit more volatile.

[00:04:16]Um market volatility itself through the VIX and its 50-day moving average, and uh then we have safe haven demand or uh the difference between 20-day stock and bond returns. That one's also showing extreme greed now. And then the junk bond demand, they say showing fear right now. They they put all this together to come up with the index, and then based on the composite of all these put together, they they position this on the the dial here. So, one day ago it was 66, now it's at at 67. A week ago it was 63. A month ago, extreme fear at 22, over in this zone here.

[00:04:56]All right, so that's how it works. Now, let's go to the timeline of it so we can see how how the the CNN Fear & Greed Index has fluctuated over the past year.

[00:05:04]Subscribers, if you're wondering why I'm showing this instead of our proprietary index inside The Kelly Letter, which is net sentiment, which includes as a component the CNN Fear & Greed Index, the reason I'm not showing ours is that that's proprietary to The Kelly Letter, and this this teaches the same lesson anyway, that that you don't really need sentiment data because we already have price data, and that's all we need to run our plans, and that's all uh pretty much anyone needs. That's the point of this video.

[00:05:34]All right. Now, let's One thing we need to get up front is that you're never going to know um exactly what you you're never going to know where it's going to go. How how far is it going to go into extreme greed? For example, people say, "Oh, look, here here's the peak up here, and and here's the bottom down here. Should have bought here and sold here and bought here." And what they're doing with this hindsight benefit and hindsight bias, if it's something they carry cognitively, is they're automatically assuming they knew this was the top or this was the bottom. But at the time, you didn't know that. So, the best we can do really is say, "Let's come up with a rule that says when it gets into extreme greed, we're going to sell. When it gets into extreme fear, that is 25 or less, we're going to buy."

[00:06:24]So, when it pokes into extreme greed, we're going to sell. When it pokes into extreme fear, we're going to buy.

[00:06:29]Because we can't know when it goes into extreme fear here that it's eventually going to go all the way down to here until later, looking back like we're doing now. We can't know at this point that, you know, we think, "Oh, wow."

[00:06:41]Especially if it comes up here and we think, "Well, that was the bottom." But little did we know this was coming. So, let's posit at least a reasonable rule that says when it gets into extreme greed is when you might consider selling. When it gets into extreme fear, you might consider buying because you can't know how far it's going to go.

[00:06:59]How about up here? Back in early July of 2025, we were in we just poked into extreme greed. Was that a good time to sell?

[00:07:10]Let's go to our our S&P 500.

[00:07:13]This is over the same 1-year time frame.

[00:07:16]Early July 2025, good time to sell?

[00:07:20]Not at all.

[00:07:21]Uh the market kept going up for a long time after that. You didn't That was a bad time to sell. So, was greed extreme then? Yes. People were extremely greedy.

[00:07:30]They were excited about this market because it had been rising so long. You see, this this was after the Liberation Day tariffs were looking like it was the taco trade. Trump was going to chicken out on these, and they weren't going to be as bad as the bluster. So, we had this huge rally off the bottom from April, and we we're still in that rally here, but already investors in this zone right here, which I'm circling, were were feeling very greedy.

[00:07:55]And so, the greed and fear indicator showed you, uh-oh, this is a danger zone, and by our rule, if you get into extreme greed, you would sell at that point, right? Because maybe it's going to go up here, yes, but you don't know, and in fact, it didn't. That was sort of the peak of greed for that cycle, and was a terrible time to have sold. Not terrible, we got a little bit of a dip here, but when you in in light of the whole trajectory, that was the wrong move getting out of stocks at that point.

[00:08:23]Going on to the next one.

[00:08:25]All right, down here. Are we going to this low point? No, we're not because we didn't know at the time it was going that low. This is where we poke into extreme fear, mid-October 2025.

[00:08:36]Mid-October 2025.

[00:08:38]Here we are. Was that a good time to to buy?

[00:08:44]Um well, All right. According to this, the the better time to buy would have been would have been mid-November, but here mid-October, it's already saying extreme fear, and then we know in hindsight that in mid-November was even more extreme fear. So, good times to buy? Let's see, right here.

[00:09:03]Kind of. You get a spike up here, so maybe a short-term trade could have worked right there. And then a good time to buy mid-November? Yeah, I'd say that one pretty darn clear. Great time to buy mid-November here because look at this, it came up here.

[00:09:17]Big picture though, this whole thing, let me just put a finer point on it here. If if we're going to say from mid-October to kind of how the market did for a while, I'd call that sideways. I don't think we can we can say there's any great need to buy or sell, and you really wouldn't notice much difference going through Christmas and New Year's if you just held on through the the the peak up here and the drop down here, and it's pretty much sideways, we could call that. So, I'm not really sure that that's a a plus or minus for for greed and fear, just sort of unnecessary activity, right?

[00:09:53]Which which would be a net negative. If it's unnecessary activity, then why bother? You shouldn't be distracted by such noise.

[00:10:00]The next peak we get to here with actually never did get up into extreme greed, so we wouldn't have taken any action by the rule of selling when we're in extreme greed, right?

[00:10:10]Um but but that's right where it happened was in in at the end of January, end of January on the price chart right about in here. Again, still going sideways, didn't get up into the sell signal though, so you can't can't say it would have gotten you out before this big drop.

[00:10:25]Into the big drop we went to the end of March, and that's what you're seeing here. This is sentiment dropping dramatically and at the end of March we were down at extreme fear. This this bottom of the sentiment line coincided with the bottom of the price line. We're talking end of March right here. Here's here's the the S&P 500's bottom at the end of March. Here's CNN Fear & Greed's bottom at the end of March. So, great in the sense that yes, the sentiment indicator showed you a good time to buy.

[00:10:58]But the takeaway here is so did the price chart. Wha- why did you need sentiment to tell you prices are low here? The price told you prices were low here. Why did you need the the chart to tell you to get out here if if you were basing it just on how far we've come, well, you you could have looked at that. You would have only seen the market through here and you could have said, "You know, that's enough for me. I'm getting out." based on price alone.

[00:11:23]You didn't know how far price was going to go and with sentiment you never know how far it's going to go. In that case, it topped out there and we know now in retrospect that it was an unnecessary call to sell from here.

[00:11:34]The main thing that my research has turned up, however, is that sentiment and price are just linked indicators. You don't need the additional color added by sentiment.

[00:11:48]When price is down, you know that price is down because you've seen the price going down and that it is down. You don't need sentiment to tell you, "You're right, price is down." because you're already staring at it. You can see that it's down. Why add the extra layer for no reason?

[00:12:05]Much better to do what we do, you maybe unsurprised to hear me say.

[00:12:10]This is our performance chart going much farther back, but just over the last one year time frame.

[00:12:16]Uh we also sold into that rising market.

[00:12:19]That's what what these two gold lines are, Kelly Letter sell signals.

[00:12:23]Um that that's how our plans work. As price is rising, we do take money off the table as it's going up getting ready for an eventual drop again, so we have plenty of buying power to take advantage of that. So, like like sentiment, we were also selling on the way up here, but we didn't need sentiment to tell us that. Our our schedule plus our rules plus the behavior of price that's already on the books gave us everything we need to we we needed to take advantage of the situation then. Then when we get the drop just this year, which is the the end of March, right?

[00:12:55]This is the big drop end of March uh that you see on sentiment, you see it here on price, and you see it here on our chart, which turned into a buy signal.

[00:13:05]Right. And we don't use sentiment, so we didn't need this data. Using only this data, not exactly, we have different prices we look at, but using this idea of prices being down at this point, we knew or our plan signaled to buy.

[00:13:21]That's all you need.

[00:13:23]So, the takeaway today is that you don't need the extra information given by sentiment. It's basically when price is down, sentiment is down. When price is up, sentiment is up. In neither case of watching price or watching sentiment, do you know how far it's going to go. If price is up, it might keep going higher, it might go down. When sentiment is up, it might keep going higher, it might go down. You can't really know either way, which is why we had to have that rule of saying when sentiment goes extremely greedy, you sell. When it goes extremely fearful, you buy. But we can't know how much farther into the fearful zone or how much farther into the greedy zone it's going to go, and it's the same with price. You you couldn't know in early July of last year that even after the long run-up from the the the the tariff bottom, it still had a lot farther to go.

[00:14:16]Always the case, which is why we divide up the market into a clear schedule and do the best we can with the price change we have at that point. That spares you from having to figure out, "Well, how much farther is it going to go either down or up? I just need to take the right move based on where it is right now."

[00:14:34]Uh additional rules that help with that is if it's if it's down a little bit, you in our the case of our signals. If it's down a little bit, you buy a little bit. If it's down a lot, you buy a lot, and it's all mathematically defined, which helps you avoid the situation of of trying to look at this price chart and decide, "Where are we here? Is this the bottom? Is this the bottom? Is this the bottom? Is this the bottom?" Heading back up, "Was this the top? Was this the top? Here? Here? Here? Here?" In retrospect, we say, "Well, that was the top." Yes, yes, but you didn't know that at the time. And you never do know how high it's going to go or how low it's going to go. So, the way you get around the constant second-guessing and the constant, you know, baseless opinionizing, uh pontificating of pundits is to divide it up on into a clear schedule, react mathematically to what prices have done at those predetermined points on the calendar. That's how we do it, and it has run circles around the market over time. No need to look at sentiment. Hope this has been helpful. Maybe spares you a little little noise in your analysis.

[00:15:40]Kelly Letter subscribers, I will see you Sunday. If you're watching this and not yet a Kelly Letter subscriber, good news, we're still accepting new members.

[00:15:50]Head over to jasonkelly.com and we will get you started before this Sunday's letter. Thank you for watching.