Anyone who follows sentiment studies will know that crowd sentiment is considered a contrarian indicator. When “everyone” loves a market or security –it’s time to sell. Conversely, if “everyone” hates it—it might be time to buy. Baron Rothschild once said that the time to buy is when the blood is running in the street. That’s a gruesome play on this contrarian way of looking at things.
Sentimentrader does a number of sentiment “Optix” readings on stock/bond indices, commodities and currencies. They take sentiment data from the following sources, and rank whether each of these studies are showing how pessimistic vs optimistic various market players are.
- Market Vane Corporation
- Consensus, Inc.
- Daily Sentiment Index
- Larry Williams
- Ned Davis Research, Inc.
From there, the Optix is created to average out the overall sentiment readings. The data has been collected for a couple of decades or longer in most cases, so we can get a good handle if a market is in a good position for a turnaround based on extreme levels of pessimism – or if it’s in a position for a correction based on too much exuberance. And yes, these optix measurements take into account smart money vs. dumb money—which are read differently than most sentiment studies. Strong pessimism by “smart” players, for example, is considered bearish – whereas pessimism by the general crowd, or dumb money, is considered bullish.
Sentimentrader optix tells us that commodity market players (x-smart money) been in the “overly pessimistic” zone for some time. Note on the chart that prolonged periods of such pessimism resulted in nice rallies in the past.
The Sentimentrader bond optix history suggests that deep overbought or oversold conditions are pretty good trading signals. The bond market recently signalled an overbought sell signal—albeit less aggressive as some of its historic signals.
Interestingly, the SPX is the least predictive model of the group here. It tends to whip around a bit. For this reason, its probably best to look for moves by the indicator that are deeply over the respective buy or sell levels. We’re not seeing either of those conditions for this index at this time.
Sentimentrader USD sentiment optix has been a pretty good buy/sell signal indicator. You can see that the indicator went deep into overbought territory a while ago—and that brought the dollar into its current decline. Right now, the USD is not so overbought, but its not oversold yet either. It’s probably looking to level off at this point from a sentiment perspective.
Keith on Bloomberg/BNN MarketCall next Tuesday July 16th at 6:00pm
Need some explicit confirmations on this article.
Are you saying smart money is buying commodities ?
Are you saying smart money is selling bonds ?
Are you saying smart money is selling US dollars ?
Does any of this apply to the CDN / US / Eur / Emerg equity markets ?
Robert–these are optix’s – meaning they are compilations of mostly “dumb” money sentiment, although one of the factors within the optix will be a smart money/dumb money ratio. I cant say if its specifically smart money picking up these sectors. I can say that the overall sentiment, which is mainly “the crowd/dumb money” is indicating extremes as noted in the blog. Commodities show too much pessimism, bonds too much optimism, and US dollars coming off of what was formerly too much optimism- all by the “crowd”, not necessarily an opposing view by “smart money” but that is factored into each study.