An Update On Sentiment

I had to laugh at reading these two posts separated by one business day at Yahoo Finance. Both were authored by TradingMarkets.com but by different authors. I guess they are covered either way the market moves. If it goes up, they called it right. If it goes down, ditto.

Why Last Week's Price Action Is Bullish
http://biz.yahoo.com/tm/060724/14544.html?.v=1

If You're Bullish, You Must Be Smoking Something
http://biz.yahoo.com/tm/060721/14542.html?.v=1

The reality is they both make legitimate points. Steenbarger is correct that the market was under accumulation on both Thursday and Friday. And yet, as Landry points out, the charts look like we are ultimately headed lower.

It is important to remember the old adage that "It's always darkest before the dawn.". Or, more accurately, since that statement isn't literally accurate, "It's always darkest when it's dark.".

That said, there's alot of bulls touting very bearish sentiment. One has a report titled, "The Third Time Is A Charm" on his web site. That's because he has called the bottom two other times in the last few months only to be excoriated. Now let's get this straight. Bearish sentiment is far from being at all time highs. By one sentiment measure I follow, sentiment is at the highest level it has been in 21 years sans one other time. That time was followed by much wailing and gnashing of teeth.

I've said before that what people say and what they do are two different things. A survey is less than accurate unless you are in a bull market and picking off a relatively minor correction. At that point a sentiment survey may be of assistance in timing an addition to your capital in a bull market. Today, some shorter term sentiment readings are negative enough to fuel a substantial rally of 5-15%ish in certain market conditions. The question is if this is one of those times.

Remember, AMD, as an example, is down from about $44 to about $17 in a matter of months. If it goes down at this rate for the next fourteen months or so, and that is what I am using as a guide for the ultimate bottom, AMD will be paying us to buy the stock. ie, The price will be negative. Ditto with Broadcom, Qualcomm, eBay, etc. At some point value will be seen and buyers will come in to support these stocks regardless of whether they ultimately decline another 50% or more and regardless of whether sentiment is very awful, just awful or marginally awful. ie, Markets seldom go straight down for a long time.