I don't think people understand the true significance of sentiment, that somehow the majority is always wrong. This is a rather naive assumption, observing simply the effect and not the cause, and even then simply observing small moments in time rather than the macro-scale, where trends are formed by the majority.
The point of sentiment is to identify turning points due to buyer/seller exhaustion. When everyone is bullish, that means you are out of buyers and vice versa. Price action and trends develop because of sharp differences in opinions between the bears and bulls about the future. The net outcome is either negative movement, positive movement, or stagnation. The majority rules, causing movement to overpower the minority opinion. It is when you are out of bears/bulls to washout and convert that you have turning points.
Unfortunately, the Art of Contrarian Sentiment is exactly that, an Art. In many ways, it would even be profitable to fade the contrarians. You have to empirically identify when the money supply on one side is exhausted. Look at the Rydex ratio, you still have plenty of bears out there. The COT report shows that commercials are net long for the first time in three years in the big spoos (I donât think paying attention to the e-mini is beneficial because itâs the playground of the small specs and not the big/smart money).
Then look at the mutual fund net outflow in 2002, some -$34.7 billion. Add in Jan & Feb you have a total net outflow of approximately -$50 billion. Itâs a drop in the bucket when compared the go-go days of the dot com mania, but it shows that thereâs still money sitting on the sidelines. You can also look at Insider Selling and see that itâs the highest its been since late last year. Put/Call ratio, VIX, etc. etc. etc. are significantly more empirical TA, but even those are subjective; their nature and threshholds changing in the market enviroment (secular bear/bull).
The turning point in this rally is when the bullish money is exhausted. And not through the simple and rather primitive identification of newsletter/guru sentiment.
Contrarian sentiment needs to be refined to the point where you can identify when the money supply is exhausted and not simply taking a head count of a bunch of a internet gurus. Votes are cast with dollars, not op-ed pieces pounded on coffee stained keyboards with stubby fat appendages or the vacuous talking heads on CNBC.
The point of sentiment is to identify turning points due to buyer/seller exhaustion. When everyone is bullish, that means you are out of buyers and vice versa. Price action and trends develop because of sharp differences in opinions between the bears and bulls about the future. The net outcome is either negative movement, positive movement, or stagnation. The majority rules, causing movement to overpower the minority opinion. It is when you are out of bears/bulls to washout and convert that you have turning points.
Unfortunately, the Art of Contrarian Sentiment is exactly that, an Art. In many ways, it would even be profitable to fade the contrarians. You have to empirically identify when the money supply on one side is exhausted. Look at the Rydex ratio, you still have plenty of bears out there. The COT report shows that commercials are net long for the first time in three years in the big spoos (I donât think paying attention to the e-mini is beneficial because itâs the playground of the small specs and not the big/smart money).
Then look at the mutual fund net outflow in 2002, some -$34.7 billion. Add in Jan & Feb you have a total net outflow of approximately -$50 billion. Itâs a drop in the bucket when compared the go-go days of the dot com mania, but it shows that thereâs still money sitting on the sidelines. You can also look at Insider Selling and see that itâs the highest its been since late last year. Put/Call ratio, VIX, etc. etc. etc. are significantly more empirical TA, but even those are subjective; their nature and threshholds changing in the market enviroment (secular bear/bull).
The turning point in this rally is when the bullish money is exhausted. And not through the simple and rather primitive identification of newsletter/guru sentiment.
Contrarian sentiment needs to be refined to the point where you can identify when the money supply is exhausted and not simply taking a head count of a bunch of a internet gurus. Votes are cast with dollars, not op-ed pieces pounded on coffee stained keyboards with stubby fat appendages or the vacuous talking heads on CNBC.
