My Beef Against Contrarian Sentiment TA

I don't think people understand the true significance of sentiment, that somehow the majority is always wrong. This is a rather naive assumption, observing simply the effect and not the cause, and even then simply observing small moments in time rather than the macro-scale, where trends are formed by the majority.

The point of sentiment is to identify turning points due to buyer/seller exhaustion. When everyone is bullish, that means you are out of buyers and vice versa. Price action and trends develop because of sharp differences in opinions between the bears and bulls about the future. The net outcome is either negative movement, positive movement, or stagnation. The majority rules, causing movement to overpower the minority opinion. It is when you are out of bears/bulls to washout and convert that you have turning points.

Unfortunately, the Art of Contrarian Sentiment is exactly that, an Art. In many ways, it would even be profitable to fade the contrarians. You have to empirically identify when the money supply on one side is exhausted. Look at the Rydex ratio, you still have plenty of bears out there. The COT report shows that commercials are net long for the first time in three years in the big spoos (I don’t think paying attention to the e-mini is beneficial because it’s the playground of the small specs and not the big/smart money).

Then look at the mutual fund net outflow in 2002, some -$34.7 billion. Add in Jan & Feb you have a total net outflow of approximately -$50 billion. It’s a drop in the bucket when compared the go-go days of the dot com mania, but it shows that there’s still money sitting on the sidelines. You can also look at Insider Selling and see that it’s the highest its been since late last year. Put/Call ratio, VIX, etc. etc. etc. are significantly more empirical TA, but even those are subjective; their nature and threshholds changing in the market enviroment (secular bear/bull).

The turning point in this rally is when the bullish money is exhausted. And not through the simple and rather primitive identification of newsletter/guru sentiment.

Contrarian sentiment needs to be refined to the point where you can identify when the money supply is exhausted and not simply taking a head count of a bunch of a internet gurus. Votes are cast with dollars, not op-ed pieces pounded on coffee stained keyboards with stubby fat appendages or the vacuous talking heads on CNBC.

 

So you think that the majority is wrong about the majority being wrong? More evidence that the majority is always wrong. Heh.

Seriously, Murphy's futures book says in a nutshell what you are saying. In particular he says chances are the trend will continue as long as open interest keeps rising.

 

There is a "sea-change" occurring in my opinion.

This period looks alot like the post 1966 move..a massive runup from 1942-66 (like 82-2000); based on productivity and innovation.

Then a 29% decline in the markets into 1970, with attendant denial rallies notwithstanding...Vietnam the primary culrpit here...with the primary effect being war instability, et al.

Sound familiar?

The periods look almost identical. It's at this point, I think we could be at 5/70 levels, where the fundamentals "looked" tepid at best, but the market staged a 43% rally into 1/01/1973 (an election year BTW, sound familiar?). Only to drop 40% into the 74 lows..then nowhere for 8 years!

I "think" this may be where we are?

So if my reasoning is correct; we have a huge counter-trend rally into BUSH 04 (SP 1150). And the a 40% swoon to new lows (SP 660); then like 74 low's---base and voila ...new BULL mkt in 2012..when all the Boomers clear out of 401Ks.!!

Anyway..my .02 cents.

Best

david

 

Interesting idea (wasn't around then so I wouldn't know), do you have a side-by-side chart comparison?

 

Yes I do. I will fwd to you soon..if I can figger out how!

Best

david

 

These charts are non-logarithmic. The 'period' or zoom was set based on the earlier dates and I then slid to the right, so the number of days/years shown is the same on both charts. My volume data is not correct from 5/21/2001 on, and the data is shown as monthly bars.

 

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These two are logarithmic:

 

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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.