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The Optimism Game: Which Player Matters Most for Stocks?

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Do you know what the number one currency in the world is? Is it the US dollar, or the euro, or even the Chinese yuan?

It's none of those. The number one currency for global economies and financial markets is confidence.

We learned that lesson in a big way during the post-Lehman financial crisis when large banks like JPMorgan (JPM - Free Report) , Goldman Sachs (GS - Free Report) and Bank of America (BAC - Free Report) , were near collapse and foreshadowing a major economic depression.

It took massive liquidity and backstopping measures by central banks to shore up the commercial and investment banks and restore stability and liquidity, as prerequisites for confidence.

The global economy seems a long way away from another crisis, but I find that keeping tabs on quantitative confidence trends is still always a good practice.

In the video that accompanies this article, I look at those trends from three different groups of economic and market participants.

Each will shed light on a different time frame of concern: the near-term of a few weeks, the medium term of 1-3 months, and the longer term of 3-12 months.

Institutional Investors: Medium-Term Macro Angst

I begin with the money that moves stocks. Fund managers of all stripes -- mutual, pension, insurance, hedge, endowment, bank, etc. -- are negative right now because they see all kinds of macro worries, such as these 5 sleep-deprivers...

Global growth slowdown
Earnings deceleration for US corporates
Probable growth peak for US economy
Rising interest rates/less central bank support
Trade tariff battles and their ripple effects

These worries are forcing an exodus from high-growth, high-valuation market leaders like Amazon (AMZN - Free Report) and even from Technology value plays like Apple (AAPL - Free Report) .

In the video, I show 3 key measures of large investor confidence, or lack thereof. And I share my estimation of when and what it will take to turn this important group net positive again on stocks, to ensure new highs above S&P 3,000 next year.

Newsletter Intelligence: Short-Term Swings of Optimism and Pessimism

My favorite investor sentiment view is the Investors Intelligence survey. It's done weekly and has 3 decades of data going back to 1987.

And it's a classic "contrarian" indicator as the newsletter writers tend to get too bullish when stock prices are high and too bearish when they correct.

In the video, I go over the 3 views of this survey data that point me toward a conclusion of weaker stock prices this month to wash-out the current complacency. The primary metrics show a big drop in bullishness (optimism) in the past six weeks, but I think bearishness (pessimism) needs to rise further as the market tests the October correction lows.

This will provide a stronger contrarian buy signal, as is historically typical at significant market bottoms.

Accordingly, I tightened up risk and raised cash this week for a trip below S&P 2700 which we are seeing unfold as I type.

Backbone Confidence: Long-Term Economic Health Felt By Consumers and Small Business

But I'm not long-term bearish on stocks. That's because of the still-strong economic backbone, US consumers and small business confidence and optimism.

In the video, I have two key charts to show you in this realm that speak of steady growth in the latter innings of what could be the longest economic expansion ever -- especially as interest rates still have plenty of room to run higher without causing a recession.

In conclusion, we have three groups of economic players who tell us every month -- sometimes every week -- where their money, and emotions, are going.

We not only need to listen and pay attention. We also need to sort out what time frames matter for each group so that we know how to use their bias for our own goals.

Then we can be on the profitable side of short-term and long-term opportunities.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service.

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