Sentimentology
Ok, I'm busting on a legitimate geology term as a parody for Scientology but this stock market sentiment debate sure seems to be an interesting one. Hopefully, there are no Scientologists out there reading my board because I don't mean to offend anyone. I also believe little green men are inside all of us and they came to earth on 747s or what ever it is L. Ron Hubbard dreamt after a nice ride on the LSD train. I'm kidding! It's my Lewis Black imitation. I would never discount anyone as a friend or associate because of what religion or beliefs they have. Who actually knows what reality is other than what we've conjured up in our minds? It's not so implausible we came from some place else. Superman did and he's a pretty cool guy. Ok, there goes any attempt at professionalism on my blog.
What was I talking about? Let me back up. Most of the readers on this board understand the theory behind market sentiment but if you don't, the theory goes that the majority of people are wrong. So, when they are all optimistic, the market is vulnerable to a decline and when they are pessimistic, the market will likely go up. There is some actual logic to this but I don't feel like writing a book today. It's a legitimate concept if you know how to apply it. Recently, we have people out-sentimenting the sentiment. "Well, if sentiment is really bad, we'll get a rally. Err, well, maybe if everyone thinks sentiment is really bad, then it's really not and we won't get a rally." Huh? I've written about sentiment a few times. I believe one of my first posts was about sentiment and how it would likely fail the bulls over a long period of time.
I'm going to chime in with my two cents. First off, you might want to use independent variables in your analysis. Most people are measuring the same thing seventy five different ways. Investor's Intelligence surveys, Rydex funds ratios, put/call ratios, other polled sentiment ratios, short interest ratios, McClellan oscillators, stochastics, other oscillators, bullish percent, stocks above or below moving averages, price declines and on and on and on and on and on. They are all dependent variables. They are all measuring the same data point: PRICE. You don't need to have seventy five different dependent data points to determine people are negative. If prices are dropping, people are negative. I really do not like opinion surveys such as Investors Intelligence at all. They are highly unreliable in my estimation and people, being irrational, may be invested to the hilt and bearish. Or they may be bearish for a reason as they were in 2000 before the Nasdaq fell 85%. If I use surveys at all, it would be as a divergence or at very significant extremes. ie, If people are bearish when the S&P 500 is within a few percent of a six year high, that smells funny. That happened in 2000 and again today. Something is off. Yet, when I look at a long term gauge of sentiment I like, it is at the second highest level in twenty years. The other time? Right before the Nasdaq fell 85%.
Now using some of the sentiment data above, you may get a better idea of how oversold or overbought a short term move is but I don't need 75 gauges to know the sentiment is negative after the May decline. One will do fine for me. When stocks like AMD or Qualcomm or eBay or Broadcom fall 50-70% and the semiconductors drop 20% in a few months, there is a problem and sentiment is going to be negative. But, the problem with sentiment is it can always get worse or better and it can stay at either extreme for long periods of time. Did overly bullish sentiment keep the stock market from going ballistic in 1996-2000? Hardly.
Here's the deal with sentiment. All that matters is that you know what the big money is doing and follow it. It's not about what other people think and trying to determine if people are positive or negative. It's what the big money thinks. The Generals move this market and all you need to be is a lowly private in their army. There is absolutely nothing else for you to ever think about. When I read these reports by people trying to divine what will be the next big thing, I just tune out. Well, it's going to be grains because we are in a drought. It's going to be technology because of Web 2.0. It's going to be energy because we are running out of oil. Blah, blah, blah. The reality is most have no idea. (Some very sharp strategic thinkers actually do but they aren't going to tell you. At least not for free.) If big money thinks its going to be a restaurant chain selling a Krispy Kreme doughnut burger, you'd be smart to ride it until they don't like it any more. If big money thinks the market is going to decline, you had better take notice. Fundamental analysis, to me, is ridiculous. To pay HAAWVAAAWD University $250,000 for a degree to know how to value stocks is ludicrous. One can theorize, hypothesize, hypnotize and aggrandize about what to buy based on fundamentals but it simply doesn't matter. If you aren't trading with the Generals, you are on the wrong side of the trade.
What was I talking about? Let me back up. Most of the readers on this board understand the theory behind market sentiment but if you don't, the theory goes that the majority of people are wrong. So, when they are all optimistic, the market is vulnerable to a decline and when they are pessimistic, the market will likely go up. There is some actual logic to this but I don't feel like writing a book today. It's a legitimate concept if you know how to apply it. Recently, we have people out-sentimenting the sentiment. "Well, if sentiment is really bad, we'll get a rally. Err, well, maybe if everyone thinks sentiment is really bad, then it's really not and we won't get a rally." Huh? I've written about sentiment a few times. I believe one of my first posts was about sentiment and how it would likely fail the bulls over a long period of time.
I'm going to chime in with my two cents. First off, you might want to use independent variables in your analysis. Most people are measuring the same thing seventy five different ways. Investor's Intelligence surveys, Rydex funds ratios, put/call ratios, other polled sentiment ratios, short interest ratios, McClellan oscillators, stochastics, other oscillators, bullish percent, stocks above or below moving averages, price declines and on and on and on and on and on. They are all dependent variables. They are all measuring the same data point: PRICE. You don't need to have seventy five different dependent data points to determine people are negative. If prices are dropping, people are negative. I really do not like opinion surveys such as Investors Intelligence at all. They are highly unreliable in my estimation and people, being irrational, may be invested to the hilt and bearish. Or they may be bearish for a reason as they were in 2000 before the Nasdaq fell 85%. If I use surveys at all, it would be as a divergence or at very significant extremes. ie, If people are bearish when the S&P 500 is within a few percent of a six year high, that smells funny. That happened in 2000 and again today. Something is off. Yet, when I look at a long term gauge of sentiment I like, it is at the second highest level in twenty years. The other time? Right before the Nasdaq fell 85%.
Now using some of the sentiment data above, you may get a better idea of how oversold or overbought a short term move is but I don't need 75 gauges to know the sentiment is negative after the May decline. One will do fine for me. When stocks like AMD or Qualcomm or eBay or Broadcom fall 50-70% and the semiconductors drop 20% in a few months, there is a problem and sentiment is going to be negative. But, the problem with sentiment is it can always get worse or better and it can stay at either extreme for long periods of time. Did overly bullish sentiment keep the stock market from going ballistic in 1996-2000? Hardly.
Here's the deal with sentiment. All that matters is that you know what the big money is doing and follow it. It's not about what other people think and trying to determine if people are positive or negative. It's what the big money thinks. The Generals move this market and all you need to be is a lowly private in their army. There is absolutely nothing else for you to ever think about. When I read these reports by people trying to divine what will be the next big thing, I just tune out. Well, it's going to be grains because we are in a drought. It's going to be technology because of Web 2.0. It's going to be energy because we are running out of oil. Blah, blah, blah. The reality is most have no idea. (Some very sharp strategic thinkers actually do but they aren't going to tell you. At least not for free.) If big money thinks its going to be a restaurant chain selling a Krispy Kreme doughnut burger, you'd be smart to ride it until they don't like it any more. If big money thinks the market is going to decline, you had better take notice. Fundamental analysis, to me, is ridiculous. To pay HAAWVAAAWD University $250,000 for a degree to know how to value stocks is ludicrous. One can theorize, hypothesize, hypnotize and aggrandize about what to buy based on fundamentals but it simply doesn't matter. If you aren't trading with the Generals, you are on the wrong side of the trade.
<< Home