This is a classical bear market rally. The VIX is quite low, Bull/Bear ratio is dramatically overextended, lots of good news and positive stories filling the headlines (Greenspan talking about an improving economy). This is exactly what is expected to happen given the current sentiment readings. I'm absolutely convinced we are witnessing a repeat of Japan in the early 90's. For the entire length of the bull market, 82-00, all we heard about was how low interest rates cure all market ills. Now it's been over 2 years since rates started to get cut, yet the perma bulls are suddenly silent about the lack of growth they've generated. The VIX and the VXN are screaming complaceny right now. I'm into the Sept 90 DJX puts.
The point is, you can't simply depend on what the majority of newsletters are saying (Investor Vane, AAII, etc.) and then fading the crowd. You have to identify when the MONEY SUPPLY IS EXHAUSTED. There's still money on the sidelines that MAY or MAY NOT be injected into the market, as evidenced by the new net long COTs, last years mutual funds outflows, and growing bonds bull. So what if there are 20% bears newsletter writers? Do those bears run mutual funds, penson funds, and hedge funds? Its just pure SENTIMENT and OPINIONS (and everyone has one of THOSE), not hard empirical evidence. I have much more respect for VIX, VXN, put/call ratio, etc. because those are MEASUREABLE and EMPIRICAL events substantiated by someone having the BALLS to put MONEY down on a position. If there's still money out there to put where your mouth is, there will be a trend. Not by calling up a bunch of internet hacks on the phone and asking their "expert" opinion and then fading them. Its all about the money and how much is still out there to support/fade the market. SHOW ME THE MONEY!
Excellent posts, JT. Newcomers often miscalculate regarading sentiment. It's amazing just how far the "majority" can push prices before they reverse (many people learned this lesson the hard way in late '99/early '00). As you say, the trend will reverse when there are no more buyers. But even though there has been some evidence of distribution, buyers are absorbing these shares quite well. If they continue to do so, and large amounts of supply are not dumped on the market, this rally could "wedge" itself up into levels that will baffle those who swear by sentiment, patterns, etc. Know the tell-tale signs of exhaustion and you'll be fine.
I totally disagree with you. I think these surveys are a great way to measure sentiment especially the Investors Intelligence survey. The Investors Intelligence survey is one of the best sentiment gauges that I know of. Sure these âexpertsâ may not put $ on the line but they are an excellent measuring stick of how much bullish/bearish sentiment is out there. You want empirical evidence. How about in late July 2002 when the bearish advisors were greater than bullish ones? Great time to buy there are too many bears. Then it bulls out numbered bears through September but on the very week of the bottom in October the bears out number the bulls yet again for another great buying opportunity. How about tops you say? Ok. John Bollinger did a study on this particular survey and when the difference between the bulls and bears are greater than 30 points you should start looking for a top. In January 2002 that is a time when there were a 30 point difference. So it did not immediately start to fall off a cliff that month but it sure would have told you to not put on any new long positions. I actually did throw out a few shorts in late January. Back in January of 2001 the bulls went to 60% which is a very high extreme do you think that it was a great time to short especially since the trend was down anyway? What is it showing right now? It has a 30 point difference to the bullish side and has been showing that since 5/7/02. I have been looking for a sign of a reversal but even though it has made a straight line up since then it has prevented me from taking on shorts (except for one). The point is it is a good indicator if you use it correctly like any other indicator whether it is a derivative of price, sentiment, volatility etcâ¦
If any of you have Realmoney, Rev Shark has been talking about this notion for a few weeks. He thinks that while most people are bullish, they are underinvested because they haven't had the confidence to act fully on their bullish convictions and hence they still have plenty of buying power. It would be very interesting if someone could come up with a decent way to actually measure buying power to be used along side the sentiment numbers.
EBAY, AMZN, YHOO, USAI, homebuilders...the new "Nifty 50" People have been "too" conditioned to be bearish, myself included. Honestly I have 2 scenarios... 1. A counter-trend rally like 5/70-1/73 in the election cycle; poor fundies ..but rally anyway repeat...we look very much like that now...OR 2. This rally will fall apart like the rest, and my SP 660 tgt will come this summer, rather than 2006. Either way ...just trading best david
Who's talking new bull market? I am saying big time counter-trend rally. Look at factory orders today, off by double. And the market keeps hanging in there, me I think BUSH is buying spooz into 2004..but ..who knows! Best David
JT, Good observations. Sentiment is at best a secondary indicator and not very useful for timing purposes. I think the media gives sentiment way too much emphasis. The typical non-trading "business journalist" loves contrarian approaches because they fit in with his preconception that market participants are dumbasses. What could the great unwashed possibly know? And there are an endless supply of contrarian gurus to interview and quote. The majority is right until it's wrong. You can make an awful lot of money going along with the crowd. Just don't hang around to see the end if you smell smoke.
THe large current discrepancy between bulls/bears in the II survey simply is an alert, becuase history has shown that often the larger discrepancies foreshadow trend changes in the nearer term, although not always. The 56% bullish advisors now are right! They may not be in two weeks but now they are right.