Sentiment indicators don't tell the true story

Here's a comment from a trader Tim Collins over at realmoney.com regarding the weakness in some of the NASDAQ high flyers such as NFXL

"Did someone over at the Fed sneeze on the buy key? No one wanted to touch it until it was properly cleaned and sterilized?"


This type of contempt towards the market is a common attitude traders have. Although I'm sure Tim wasn't totally serious with that comment, there is this notion out there that the bull market is mainly the result of manipulation by the fed/government. In the "buy the dip" video I recently posted you can see this same attitude. Why is it there is no mention from these guys that earnings have exploded to the upside for the past 18 months and is on track to reach near all time record levels for the year? Nahhh....it's all bs government manipulation by the fed right? These clowns are in such denial it's bordering delusion.


Despite the low put/call ratio readings, a high number of bulls in the sentiment survey's, ect, which bears use to claim that practically everyone is bullish, it's still apparent to me that the deep rooted i.e. longer term sentiment out there is skepticism/bearishness. As I said before sentiment indicators as the above mentioned, only pertains to short term traders and therefore only relevant to ST prospects of the market. Plus, we have seen time and time again that once the market dips to any significant degree, the excessive bullishness as per these indicators gets unwound quickly and hits the opposite side of the ledger.

Look at mutual fund flows, look at consumer confidence, look at the media and ask the average Joe if he's positive on the economy..... then try to tell me with a straight face "everyone is bullish". Please, give me a fucking break. Who are you kidding?

In conclusion, yes, traditional sentiment indicators are redlining here but there's 2 important caveats to this.

1) bullish sentiment in a bull market can stay chronic for weeks/months before the market corrects in a significant way
2) this "excessive bullishness" only pertains to the ST or IT term prospect of the market.

When it comes to the long term, things like consumer confidence, mutual fund flows (over long periods) and the general attitude the media and Mr. Joe Blow investor have towards the economy are what you should be paying attention to sentiment wise. In addition, monetary conditions are important to watch. Bull markets die when you have a combination of high LT bullish sentiment and tight monetary conditions (inverted yield curve). A major policy mistake or series of policy mistakes could possibly derail a bull market as well but such a thing hasn't happened since 1937 when stimulus was withdrawn too early. Keep in mind though that before that bull market ended in 1937 it had already been ongoing for 4+ years and the economic damage in the early 1930's was far more severe than what we experienced and thus the economy was more fragile and vulnerable to set backs from policy errors.

Correction or no correction, conditions are nowhere close to suggest the bull market is over. I'm still sitting on a good sized cash position but I doubled up my position on isc.vn just before it broke out last week and so far so good (now that I said this it's almost all but guaranteed to drop). I may double up on wzl.to as well. I'm comfortable with my long exposure right now because it's not aggressive (I have 60% cash) but it's enough to make an impact on my bottom line and my longs have been all very non-correlated to the day to day moves of market...essentially no correlation at all. My longs are all stocks that currently trade between $1-2. A lot of people tend to think these types of stocks are very risky. It depends....You can find a lot more inefficiently priced stocks in the microcap/small cap space. In fact, I find some of these stocks are much safer than your typical "safe" dividend paying large cap stocks. And the profit potential is far more lucrative and explosive. Yes, there's a lot of junk out there that trades sub $5 and liquidity can be an issue but there's also a lot of hidden gems if you dig deep enough. The true junk of the market are the penny stocks that typically trade below .20 on the OTCBB or the TSXV. You should stay away from these as they are typically either flight by night, lottery ticket mining companies or permanently broken companies.