My Beef Against Contrarian Sentiment TA

This is a classical bear market rally. The VIX is quite low, Bull/Bear ratio is dramatically overextended, lots of good news and positive stories filling the headlines (Greenspan talking about an improving economy). This is exactly what is expected to happen given the current sentiment readings.

I'm absolutely convinced we are witnessing a repeat of Japan in the early 90's. For the entire length of the bull market, 82-00, all we heard about was how low interest rates cure all market ills. Now it's been over 2 years since rates started to get cut, yet the perma bulls are suddenly silent about the lack of growth they've generated.

The VIX and the VXN are screaming complaceny right now. I'm into the Sept 90 DJX puts.
 
Quote from jbtrader23:

This is a classical bear market rally. The VIX is quite low, Bull/Bear ratio is dramatically overextended, lots of good news and positive stories filling the headlines (Greenspan talking about an improving economy). This is exactly what is expected to happen given the current sentiment readings.
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The point is, you can't simply depend on what the majority of newsletters are saying (Investor Vane, AAII, etc.) and then fading the crowd.

You have to identify when the MONEY SUPPLY IS EXHAUSTED. There's still money on the sidelines that MAY or MAY NOT be injected into the market, as evidenced by the new net long COTs, last years mutual funds outflows, and growing bonds bull.

So what if there are 20% bears newsletter writers? Do those bears run mutual funds, penson funds, and hedge funds? Its just pure SENTIMENT and OPINIONS (and everyone has one of THOSE), not hard empirical evidence.

I have much more respect for VIX, VXN, put/call ratio, etc. because those are MEASUREABLE and EMPIRICAL events substantiated by someone having the BALLS to put MONEY down on a position. If there's still money out there to put where your mouth is, there will be a trend. Not by calling up a bunch of internet hacks on the phone and asking their "expert" opinion and then fading them. Its all about the money and how much is still out there to support/fade the market.

SHOW ME THE MONEY!
 
Excellent posts, JT. Newcomers often miscalculate regarading sentiment. It's amazing just how far the "majority" can push prices before they reverse (many people learned this lesson the hard way in late '99/early '00).

As you say, the trend will reverse when there are no more buyers. But even though there has been some evidence of distribution, buyers are absorbing these shares quite well. If they continue to do so, and large amounts of supply are not dumped on the market, this rally could "wedge" itself up into levels that will baffle those who swear by sentiment, patterns, etc.

Know the tell-tale signs of exhaustion and you'll be fine.
 
Quote from JT47319:



The point is, you can't simply depend on what the majority of newsletters are saying (Investor Vane, AAII, etc.) and then fading the crowd.

You have to identify when the MONEY SUPPLY IS EXHAUSTED. There's still money on the sidelines that MAY or MAY NOT be injected into the market, as evidenced by the new net long COTs, last years mutual funds outflows, and growing bonds bull.

So what if there are 20% bears newsletter writers? Do those bears run mutual funds, penson funds, and hedge funds? Its just pure SENTIMENT and OPINIONS (and everyone has one of THOSE), not hard empirical evidence.

I have much more respect for VIX, VXN, put/call ratio, etc. because those are MEASUREABLE and EMPIRICAL events substantiated by someone having the BALLS to put MONEY down on a position. If there's still money out there to put where your mouth is, there will be a trend. Not by calling up a bunch of internet hacks on the phone and asking their "expert" opinion and then fading them. Its all about the money and how much is still out there to support/fade the market.

SHOW ME THE MONEY!
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I totally disagree with you. I think these surveys are a great way to measure sentiment especially the Investors Intelligence survey.

The Investors Intelligence survey is one of the best sentiment gauges that I know of. Sure these “experts” may not put $ on the line but they are an excellent measuring stick of how much bullish/bearish sentiment is out there. You want empirical evidence. How about in late July 2002 when the bearish advisors were greater than bullish ones? Great time to buy there are too many bears. Then it bulls out numbered bears through September but on the very week of the bottom in October the bears out number the bulls yet again for another great buying opportunity. How about tops you say? Ok. John Bollinger did a study on this particular survey and when the difference between the bulls and bears are greater than 30 points you should start looking for a top. In January 2002 that is a time when there were a 30 point difference. So it did not immediately start to fall off a cliff that month but it sure would have told you to not put on any new long positions. I actually did throw out a few shorts in late January. Back in January of 2001 the bulls went to 60% which is a very high extreme do you think that it was a great time to short especially since the trend was down anyway?


What is it showing right now? It has a 30 point difference to the bullish side and has been showing that since 5/7/02. I have been looking for a sign of a reversal but even though it has made a straight line up since then it has prevented me from taking on shorts (except for one). The point is it is a good indicator if you use it correctly like any other indicator whether it is a derivative of price, sentiment, volatility etc…

:)
 
If any of you have Realmoney, Rev Shark has been talking about this notion for a few weeks. He thinks that while most people are bullish, they are underinvested because they haven't had the confidence to act fully on their bullish convictions and hence they still have plenty of buying power.

It would be very interesting if someone could come up with a decent way to actually measure buying power to be used along side the sentiment numbers.
 
EBAY, AMZN, YHOO, USAI, homebuilders...the new "Nifty 50"

People have been "too" conditioned to be bearish, myself included.

Honestly I have 2 scenarios...

1. A counter-trend rally like 5/70-1/73 in the election cycle; poor fundies ..but rally anyway repeat...we look very much like that now...OR

2. This rally will fall apart like the rest, and my SP 660 tgt will come this summer, rather than 2006.

Either way ...just trading

best
david
 
Quote from dgabriel:



There probably isn't, at least not how it seems that you may think there is. Good name though, which I share.

A multimonth rally may be in the works, through the end of the year and into 04, with interruptions. Notwithstanding the current rally (which in all respects is the strongest and widest rally since the beginning of the current bear) no complete resolution has yet occurred that in the past has marked the end of major bear markets: exhaustive selling, a multitude of 90% down days, pe ratios screaming "I am cheap, take me home", like 8-10.

Short covering, increased liquidity, legislative and tax law incentives, reserved (deferred) insider selling, rebalancing of bond/equity allocation, increased perceptions of a normalization of economic growth and an attendant perception of decrease in geopolitical risk have all influenced a positive money flow in the equities, creating after the Iraq attack a sudden imbalance of supply and demand favoring the bulls.

The locomotives behind the last great secular bull overwhelmed the most ingenious and devious methods of supply, (dotcom shells, telecom issues, ipos, options issuance, insider selling etc)but it is different now, and soon I suspect the greed and impatience of the executives and insiders will swamp the chump buyers and slow and reverse this current rally, because it is clear the fundamentals will not in the end support a new bull market.
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Who's talking new bull market? I am saying big time counter-trend rally.

Look at factory orders today, off by double.

And the market keeps hanging in there, me I think BUSH is buying spooz into 2004..but ..who knows!

Best
David
 
JT,

Good observations. Sentiment is at best a secondary indicator and not very useful for timing purposes. I think the media gives sentiment way too much emphasis.

The typical non-trading "business journalist" loves contrarian approaches because they fit in with his preconception that market participants are dumbasses. What could the great unwashed possibly know? And there are an endless supply of contrarian gurus to interview and quote.

The majority is right until it's wrong. You can make an awful lot of money going along with the crowd. Just don't hang around to see the end if you smell smoke.
 
Quote from AAAintheBeltway:

The typical non-trading "business journalist" loves contrarian approaches because they fit in with his preconception that market participants are dumbasses.
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It also sells newspapers (or newsletters, or websites, or . . .)
 
THe large current discrepancy between bulls/bears in the II survey simply is an alert, becuase history has shown that often the larger discrepancies foreshadow trend changes in the nearer term, although not always. The 56% bullish advisors now are right!

They may not be in two weeks but now they are right.
 
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