Sentiment, also called market sentiment, is a measure of how people THINK about the stock market, certain Commodity Futures, or even the housing market. Market sentiment is often used as an inverse or contrarian indicator, meaning if most people are bullish then the better trade is to stay out of the market or sell. If most people are bearish then the better trade is to start buying.
Q: Why does this often work?
A: Because everybody can NOT be right!
The stock and commodity futures markets are made up of individual companies and individual commodities. Individual investors can analyze the technicals and fundamentals of each market and each individual stock and commodity, but that is only 2 of 3 dimensions in knowing why something may be going up or down.
The third dimension- Sentiment Analysis- can tell us IF something is a buy or sell. Sentiment can also help our timing to know an ESPECIALLY IMPORTANT variable in good trading: WHEN to buy and sell. You almost certainly know the old saying: “Timing is everything!” It is oh-so-very-true in successful investing.
Sentiment works because the stock market and the futures market are made up of millions of buyers and sellers. Those buyers and sellers are people. While the stocks that make up the stock market may have changed over the years, the one thing that has not changed over even the last 500 years are people. Sentiment is more about the people than it is about the stocks or futures… particularly in what they are thinking as a group.
It is not deducing, hypothesizing, gut or best guessing that sentiment. It is measured in hard terms based upon their most tangible of actions: how they are investing their money?
Warren Buffet- one of the greatest investors of all time and one of the richest people in the world- says this simple rule dictates his own investing:
“Be Fearful When Others Are Greedy & Greedy When Others Are Fearful.”
Another popular viewpoint that basically says the same thing:
People have a herd mentality. And…
The herd is usually wrong.
We find it extremely helpful to use market sentiment as part of our stock, futures, and ETF alert services. As the crowd becomes more convinced of a future outcome as a group- such as getting more and more bullish or bearish on an ETF, future, stock, sector, or market, sentiment indicators clearly show that… arming our team with crucial knowledge to make better trading decisions.
Some of the more popular sentiment indicators are:
Put to call (options) ratio.
The VIX
Commitment of traders report
The New York Stock Exchange high/low indicator
The CNN fear and greed index
Using these kinds of indicators and accepting that the herd is usually wrong, a contrarian assesses situations very differently than what seems popular or correct at the time…
Yes, it is hard to go against what the crowd is thinking & saying. The hype & excitement can spread like wildfire and make you feel like you could miss out on something. But consider this fairly recent example…
Our founder- Sal Giamarese– was instructing a group of people about investing back in March 2020… right when the COVID-19 virus impact was hitting in many ways:
Things started to shut down and no one knew what was going to happen.
The government said you cannot go to work.
There were no unemployment payments at this time.
It was a bad and scary time.
The sentiment indicator on the CNN fear and greed index- which ranges from 0 to 100- fell all the way down to ONLY 4… FOUR!!!
A reading of four was extremely bearish. It means that 96% of people were bearish. And everybody had plenty of reasons to be bearish.
Sal took a micro survey of that class- aged 25 to 80- and asked if anybody was buying stocks. Not one person raised their hand. Sal asked why? The answers were comments like these:
“it’s too risky,”
“they are shutting down the whole country,”
“the economy is going to collapse,”
“people are dying” and
“there is no cure.”
His students believed it was the end of the world. Sal knows that whenever people as a group think things are extreme, it is time to be contrarian… and in this case, the world was near maximum extreme at the same time. The reason to go contrarian in such a situation does not matter. If it turned out it was NOT the end of the world, things would get better, and the stock market would rise again.
By that time, things were so bad that the market was already down 32%. Sal said to the class, “Do you realize that in the past 100 years, the stock market was only down by 30% or more seven times?” This marked the 8th time… in only ten decades.
So, while it seemed like a terrible disaster in the making at that moment, the same had happened 7 times in only the last 100 years. If such events were perfectly orderly, 100/7 = every 14-15 years. Many in that class were alive during at least the last time or two it had happened before and so they knew what happened next. If they knew their history, the markets were 7 for 7 on what was about to occur. It was a very prime time to BUY. There is an old Wall Street saying…
“When everyone is buy-buy-buying at the extreme, there is eventually a point where all who want to buy have… and there is little cash on the sidelines left to buy more. Ideally, you are OUT or SHORT by that time because it will only take a little negative push to set off a bear market with no buying left to stop it.”
The same works the OTHER way too: when everyone is in sell-sell-sell mode to the extreme- like my students that day- there will not be much selling pressure left. Ideally, one becomes a ‘crazy’ (like a fox) buyer right about there. Because with few remaining sellers, it only takes a little bit of buying to kick off a new bull market run.
A visual way to think of this is like the energy gauge in the car. The car will have no trouble at all running while there is energy available to keep it going. It will just go-go-go. However, once all of the energy is used up, the car cannot keep right on rolling without additional fuel.
When about all:
buyers have bought, there is no more buying power to push an investment higher- great news or big innovations, etc.- will not make any difference.
sellers have sold there are no more sellers to further erode prices.
…and sentiment indicators show this in hard numbers… like that gauge getting to “Extreme Fear” at only 4 out of 100.
Looking back at that Covid-driven bear market now, we know what happened: stocks skyrocketed over the next year. What was that rule Warren Buffett applied to his own buying? Scroll back up the page and read it again if you have not already committed it to memory. It is a good one to burn into your thoughts so that the next time you are facing the same kind of extremist doom, you might think differently about it. Or when you see that everyone is bullish to an extreme, you know it is time to bail and/or short because if everyone is “IN” on this ‘surest’ of sure things, there is little left to buy more of it to further drive up the price. However, there is now PLENTY holding it who can sell as soon as the downturn gets rolling.
Timing is everything in life, especially when you are investing or trading stocks, futures, and ETFs. Learning to read sentiment is a powerful tool in becoming a better market timer. We put it to use every day in the services we offer.
Sentiment, also called market sentiment, is a measure of how people THINK about the stock market, certain Commodity Futures, or even the housing market. Market sentiment is often used as an inverse or contrarian indicator, meaning if most people are bullish then the better trade is to stay out of the market or sell. If most people are bearish then the better trade is to start buying.
Q: Why does this often work?
A: Because everybody can NOT be right!
The stock and commodity futures markets are made up of individual companies and individual commodities. Individual investors can analyze the technicals and fundamentals of each market and each individual stock and commodity, but that is only 2 of 3 dimensions in knowing why something may be going up or down.
The third dimension- Sentiment Analysis- can tell us IF something is a buy or sell. Sentiment can also help our timing to know an ESPECIALLY IMPORTANT variable in good trading: WHEN to buy and sell. You almost certainly know the old saying: “Timing is everything!” It is oh-so-very-true in successful investing.
Sentiment works because the stock market and the futures market are made up of millions of buyers and sellers. Those buyers and sellers are people. While the stocks that make up the stock market may have changed over the years, the one thing that has not changed over even the last 500 years are people. Sentiment is more about the people than it is about the stocks or futures… particularly in what they are thinking as a group.
It is not deducing, hypothesizing, gut or best guessing that sentiment. It is measured in hard terms based upon their most tangible of actions: how they are investing their money?
Warren Buffet- one of the greatest investors of all time and one of the richest people in the world- says this simple rule dictates his own investing:
“Be Fearful When Others Are Greedy & Greedy When Others Are Fearful.”
Another popular viewpoint that basically says the same thing:
We find it extremely helpful to use market sentiment as part of our stock, futures, and ETF alert services. As the crowd becomes more convinced of a future outcome as a group- such as getting more and more bullish or bearish on an ETF, future, stock, sector, or market, sentiment indicators clearly show that… arming our team with crucial knowledge to make better trading decisions.
Some of the more popular sentiment indicators are:
Using these kinds of indicators and accepting that the herd is usually wrong, a contrarian assesses situations very differently than what seems popular or correct at the time…
Yes, it is hard to go against what the crowd is thinking & saying. The hype & excitement can spread like wildfire and make you feel like you could miss out on something. But consider this fairly recent example…
Our founder- Sal Giamarese– was instructing a group of people about investing back in March 2020… right when the COVID-19 virus impact was hitting in many ways:
The sentiment indicator on the CNN fear and greed index- which ranges from 0 to 100- fell all the way down to ONLY 4… FOUR!!!
A reading of four was extremely bearish. It means that 96% of people were bearish. And everybody had plenty of reasons to be bearish.
Sal took a micro survey of that class- aged 25 to 80- and asked if anybody was buying stocks. Not one person raised their hand. Sal asked why? The answers were comments like these:
His students believed it was the end of the world. Sal knows that whenever people as a group think things are extreme, it is time to be contrarian… and in this case, the world was near maximum extreme at the same time. The reason to go contrarian in such a situation does not matter. If it turned out it was NOT the end of the world, things would get better, and the stock market would rise again.
By that time, things were so bad that the market was already down 32%. Sal said to the class, “Do you realize that in the past 100 years, the stock market was only down by 30% or more seven times?” This marked the 8th time… in only ten decades.
So, while it seemed like a terrible disaster in the making at that moment, the same had happened 7 times in only the last 100 years. If such events were perfectly orderly, 100/7 = every 14-15 years. Many in that class were alive during at least the last time or two it had happened before and so they knew what happened next. If they knew their history, the markets were 7 for 7 on what was about to occur. It was a very prime time to BUY. There is an old Wall Street saying…
“When everyone is buy-buy-buying at the extreme, there is eventually a point where all who want to buy have… and there is little cash on the sidelines left to buy more. Ideally, you are OUT or SHORT by that time because it will only take a little negative push to set off a bear market with no buying left to stop it.”
The same works the OTHER way too: when everyone is in sell-sell-sell mode to the extreme- like my students that day- there will not be much selling pressure left. Ideally, one becomes a ‘crazy’ (like a fox) buyer right about there. Because with few remaining sellers, it only takes a little bit of buying to kick off a new bull market run.
A visual way to think of this is like the energy gauge in the car. The car will have no trouble at all running while there is energy available to keep it going. It will just go-go-go. However, once all of the energy is used up, the car cannot keep right on rolling without additional fuel.
When about all:
…and sentiment indicators show this in hard numbers… like that gauge getting to “Extreme Fear” at only 4 out of 100.
Looking back at that Covid-driven bear market now, we know what happened: stocks skyrocketed over the next year. What was that rule Warren Buffett applied to his own buying? Scroll back up the page and read it again if you have not already committed it to memory. It is a good one to burn into your thoughts so that the next time you are facing the same kind of extremist doom, you might think differently about it. Or when you see that everyone is bullish to an extreme, you know it is time to bail and/or short because if everyone is “IN” on this ‘surest’ of sure things, there is little left to buy more of it to further drive up the price. However, there is now PLENTY holding it who can sell as soon as the downturn gets rolling.
Timing is everything in life, especially when you are investing or trading stocks, futures, and ETFs. Learning to read sentiment is a powerful tool in becoming a better market timer. We put it to use every day in the services we offer.
Question or Comment?