Readers of this blog along with followers of my media work know that I’m a believer in the contrarian indicators- specifically sentiment indicators. In fact, I wrote a thesis on using sentiment in conjunction with classic technical indicators as my final submission to attain my Chartered Market Technician designation. Sentiment is really a study of human behavior, as it applies to financial markets.
Think about the changes that we’ve seen over the years as investors. In my 26 year history as a stock trader, I started using a “quote machine” for my live stock prices (not as old as the ticker tape machine below, but still, nothing like today’s technology), I used printed sell side (brokerage) and Value Line research, read the morning financial press and subscribed to a mailed chart book service.
Now I have live brokerage research, a large network of live and flowing paid research subscriptions, live interactive charting, live fundamental and quantitative data, and a live news flow that is literally impossible to stay on top of. The internet changed everything – including the speed of trading, increased volume, and expedited market movements.
One thing that will NEVER change is human nature. We are herd followers. As a student of herding behavior on the market, I tend to observe that same tendencies in everyday life. We herd through fashions, auto choices, food types, you name it. For example…
- Have you noticed the pronounced usage of the word “perfect” to acknowledge an affirmative these days? Do you say “perfect” when acknowledging something? This word only became popular a year or so ago, now almost EVERYONE says “perfect” regularly. Most people aren’t even aware they say it. Herd behavior.
- How many pickup trucks are in your neighborhood? Are many of your neighbours roofing contractors and tradespeople? Probably not. 10 years ago—these vehicles were owned by “PANTs” (People Actually Needing Trucks). Now – the herd has migrated into trucks, when a sedan/ wagon would suit their lifestyle and fuel consumption needs better. My neighborhood is filled with airline pilots, accountants, bank employees, lawyers and retired folk who drive unscratched shiny pickup trucks with the bed covered 99% of the time. Young men buy fancy pickups jacked up with big tires. Herd behavior.
- Bumper stickers/t-shirts and car decals saying “Keep calm and whatever on” or those “stick family” decals – nobody had this stuff on their cars 10 years ago.
- Gluten free diets. Atkins diet. Years ago you just ate less and worked out more to get slim, and it worked just fine.
- Tattoo’s. Everyone’s got one (well, I don’t). These were limited to blue collar workers, radicals and prison inmates just a few years ago. Now, you’re unique if you don’t have a tattoo – especially in the under-40 crowd. Herding 101.
Herding is fine with fashions and vehicles, and it’s even ok during a stock or sector’s trend. After all, you need herding to drive a stock up. However, it’s when the herd becomes “too” bullish that we need to be cautious – or if its “too” bearish, we should be looking to buy. Right now, in addition to many of the tools that I study, a unique study presented by www.sentimentrader.com shows that investors have become irrationally pessimistic about the stock market—data taken from the AAII (American Assoc. of Individual Investors) sentiment survey. This herd behavior has indicated market bottoms and tops many times in the past. Here is the chart taken from sentimentrader, with green arrows showing similar pessimism by individual investors in the past – a bullish indicator.
This, and the fruition of the bullish candlestick formation last week, had me buying stocks on Friday and Monday morning –I gave you a heads up on that strategy here. I’ll continue to be legging in on the dips herein.
Keith speaking at the MoneyShow Saturday October 31, 2015 at 3:30pm
Please come out and join me – I really enjoy meeting readers of this blog at my speaking engagements. Here is the link for the details:
Thanks Keith for sharing your advice. Just wondering should I wait for a short term pull back on S&P to buy? The index has a rised over 5% in the last week. It went up too quick so I am guessing a short pull back is coming soon as those who have made 5% profit would like cash in the gains. What do you think?
yes, I do expect another small pullback–and have 20% cash waiting to take advantage of that potential
I have spent 30% of my 50% cash from April so far.
Oh, it was you pushing up the market, LOL! Thanks again for confirming my thoughts. My next question is which market should I allocate my funds. I noticed USD has declined for quite a bit. Should I weight more in Canadian market, U.S. or Eauopean matket? Looking forward to hearing from you again.
Yes, I single handily drove the market up. Man I’m good…
Anyhow – we still like the US market, but do see opportunities in some select Int’l markets ex-Canada. Beyond some very unique stories, I am not a fan of CDN stocks for much more than oversold neartermed plays. I’ll blog on some of my findings soon–doing a big exploration in Int’l ETF’s to that end over the next few days.
I have noted your investment preferences noted above. However, I hope you will consider blogging on lumber stocks based on: seasonality, US Housing stocks (ITB/XHB) holding up well and lumber futures prices and last 2 days pricing action. Also, an update on Canadian banks.
Thanks so much.
I’ll blog on banks next week–some appear to be breaking their downtrends.
Bill Carrigan mentined on BNN that money is rotating out of healthcare and consummer sectors to material and energy sectors. XLE chart tells me that it’s moving nicely above 20 and 50 day moving average. Do you think the advance of material and energy sector will be short lived? If not, is it too late to buy XLE? Thanks!
I see this rotation too. It may be short lived though, as you ask. I’m considering a trade, but not a long termed one
Keith, what time frame you have in mind ? I am in CNQ and it moved 20% in four days ….
Its difficult to call but looking at some of the individual charts like CNQ for example–there is some technical resistance coming in not too far ahead–CNQ had prior support in 2014 at $32, and last significant low on the chart was $33, so that would be a zone of resistance. Will it break through? That’s the question. Not sure that the underlying commodities are strong enough to push producers much, but it could happen. Higher risk trades, but they do look interesting!
This is good point , it was moving lately at very high volume so maybe institutions and big funds getting good back in , is this last movement call ed gap filling to last support 32-33$ which became resistance now?
I think you show the dates for the money show incorrectly. I’ll see you Oct. 31st ?
Thanks for pointing that out Rick–changing it –glad you are coming!
THE PROBLEM WITH INVESTING IS BEING FULLY INVESTED (EITHER IN STOCKS, BONDS OR CASH) ALL THE TIME. SHORT TO MID-TERM INVESTING REQUIRES TECHNICAL AND FUNDAMENTAL KNOWLEDGE. WITH SO FEW INVESTMENT FINANCIAL INSTRUMENTS SHORTING (OR GOING LONG) ON THE MARKET (BESIDE HEDGE FUNDS), WE NEED AN ETF THAT WILL PERFORM WHEN THE MARKET WILL GO DOWN ON A BEAR TREND OR UP ON A BULL TREND. WISH YOU COME UP SOME DAY WITH AN APPROPRIATE TOOL OF THAT KIND. MOST INVESTORS DON’T HAVE A SEVEN FIGURE PORTFOLIO TO START WITH, BUT ALL OF THEM DON’T LIKE TO OPEN THEIR MONTHLY STATEMENT WITH A 61.8% FIBONNACI RETRACEMENT ON THE DOWNSIDE!
J.P. (CSTA, MONTREAL CHAPTER)
JP–FYI we require only $500k total (family–all accounts) to deal with us.
As for down markets–yes, we would like to start a hedge fund to short in down markets using our techniques, but given our high trading costs etc at this point, we wont be doing that just yet–however, I do expect that some day I’ll start one. Meantime, our best shot at accomplishing the goals you mention is to stay relatively flat in selloffs by raising cash, then buy low at the turning point. It seems to be working for us – although I do recognize the potential for greater upside with shorting—–some day!
I too was looking for a bottom in October. It looks like we might have made one as the markets have moved up nicely this past week. I know the topic of your write up was about sentiment, but what are your thoughts on the volume of this rally?
Yes the volume is pretty light! But, that can be typical for this time of the yr.
THere still looks to be lots of overhead resistance for the S&P
S&P looks like it is short term overbought. STochastics and RSI in overbought area and starting the hook down thing. SAme with energy etf’s
Be bullish–Buy on the dips until resistance at S&P 2120. From there–we’ll have to play it by ear.