Today, let us briefly address sentiment what it is, what it means and how to use it in your everyday trading. There is no piece of market data that is more misused, misunderstood or misapplied than sentiment.

The spark for today’s diatribe was a State Street study of cash allocations in investment portfolios. The study found that investors worldwide had as much as 40 percent of their holdings in cash in 2014, up from 31 percent in 2012. In the U.S., cash rose to 36 percent in 2014 from 26 percent in 2012.

This led to lots of news media coverage (see “Fear of Equities Drives More Investors to Cash” and “Investor distrust drives rise in cash holdings”). Huge cash holdings aren’t what we typically think of when discussing investor complacency. The always-savvy Michael Santoli pointed to this as an example of bullish desperation.

I am less convinced. Most of the time, sentiment data contains a lot of noise and not a whole lot of actionable information.

We can break sentiment data into two distinct groups: survey and market. Survey data is what we get when we ask someone a question about related market issues. It has an anecdotal component in which someone describes what they are doing in the markets. Market sentiment is some measure of price based on actual buying and selling. This includes a wide variety of indicators ranging from put/call ratios, percentage of stocks higher than their 200-day moving average, money flow, etc.  Continues here

Category: Psychology, Sentiment, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Market Sentiment Screams Crash! Or Buy! Or Something…”

  1. Erjune says:

    There was an interesting article written this month regarding the AAII Sentiment Survey & hindsight bias. Granted, It was written by the VP of AAII, but he was surprisingly conservative (albeit still positive) in his conclusion about the utility of the survey and specifically warns against using it as a market timer.

    Here’s the link in case you haven’t already seen it:

  2. chartist says:

    Sentiment should not be used alone in a vacuum. I once worked for a well known stock market newsletter writer and I did gain one piece of actionable advice: use sentiment in conjunction with a stock chart. When people refuse to accept an advance in the chart stay with that trend. I watched helplessly for a 10% correction that never came. I got very bullish when the EEM chart broke out of a multiyear symmetrical triangle. I believe that emerging markets could actually outperform going forward and have 15% of my funds invested in the sector.

  3. Concerned Neighbour says:

    I have never appreciated the cash on the sidelines argument. For every buyer there is a seller. Cash on the sidelines only decreases when there are new investment vehicles created, such as a new stock or bond issues.

    As for sentiment data, I would argue it, like so many other traditional data metrics, has been made irrelevant by current policy. Central banks are now the prime mover, either directly through purchases of stocks, bonds, and other assets, or indirectly by lending at essentially zero or negative rates to allow others to do so. As long as they are bullish (note: history shows they are perma-bulls; certainly not value investors), assets will never go down.

  4. Mr.-Vix-It says:

    Yes, sentiment is a tricky topic. The anecdotal method is far less robust but can work at “extreme extremes”. However, you are not going to be using this method day in and day out. The market method you describe is something that works for me. It boils down to the cliche “Buy low, sell high”. The problem is how to measure what is low. Through my own experimentation over many, many years with various technical indicators, I have found a market method that works. Whenever a stock enters my buy zone I start buying and averaging down, something “they” tell you never to do. However, it works every time and the nuance is that you have to buy companies that have been around long enough to provide a dividend and have at some point been in the S&P 500 (my own criteria as I’m sure you can branch out but just not willing to risk that). For example, I was able to buy BAC at under $6 using this method and was able to buy HPQ at an average of $17 after starting to buy it at $20 and buying until it bottomed. Hewlett Packard is an interesting one because you also had on the sentiment side it being kicked out of the Dow Industrials and you had short seller Jim Chanos telling everyone that it was a great short. I don’t consider myself smarter than Jim Chanos but the market has spoken. My portfolio is up 273% in the last two years simply because my sentiment indicators based on when a stock is severely distressed told me to buy. If I had listened to anything or anyone else such as AAII, Investors Intelligence, etc. had said day in or day out, I seriously doubt that kind of outperformance could have been replicated. There are always distressed equities to buy, but I’m hoping the next cyclical bear market comes sooner than later so the pool will be bigger to choose from. Is that enough of an anecdotal sentiment indicator for you, ha!

  5. ricecake says:

    As long as the world managed to get itself disasters everywhere except here, the US stock market / bond market will go up up and nothing bad will happen for its ‘s the last resort of “safe heaven.” Everyone’s putting money into the USA pockets. When the whole world gone bad, the USA’s stand out be as the only winner.

    So, nothing to see here, really and go to sleep in peace. Beside, your fairly godmother Janet’s watch over you.