The Problem with Sentiment Swamis
Sentiment has been the talk of the town for the last couple of weeks. Arguments on both sides flying are rampant. Many of these arguments come from prominent traders and financial pundits alike. So we come back to the question that so often pops up when talking markets. How can so many smart people be on both sides of the issue?
Maybe this is because they are concentrating too much effort on the wrong variable. Sentiment is a great tool for traders to keep in the mix; but let’s face it, people are fickle and often not emotionally prepared for what Mr. Market has to offer and when. That’s why it is more important to identify what stage the markets are in before trying to read sentiment. Most don’t take this step because it is a much more difficult endeavor than to read a few polls or look at the $VIX. As usual in the markets, those who do the work tend to get rewarded. Using sentiment to forecast market performance without considering where Mr. Market is in the big picture will greatly reduce the accuracy of your read. Sentiment can act dramatically differently at different stages of the markets.
What stage do you think we are in right now? Make sure you have that established first, before joining the ranks of the Sentiment Swamis.