Bull Market Stages & My Beef Against Contrarian Sentiment:
Assume, for the moment, that this is indeed a bull market, just assume.
As I understand it, there are six phases from bull to bear: Skepticism, Growing Recognition, Enthusiasm, Disbelief, Shock and Fear, and Disgust.
We've already passed through accumulation where the players and institutions have picked up dirt cheap stocks and are now sitting on big paper profits. The second phase is the mark-up phase which we are obviously in, if not surpassed. The third phase is popular enthusiasm and speculation. Sentiment levels are at a record high and volume is heavy. Eventually rallies get weaker and volume gets weaker. Enter distribution and the beginning of the end.
One argument for distribution is that the insider selling hit a new high. An argument against is that the COT commercials hit an all new net long high in three years for the SPOOs. One group of smart money is distributing, another group of smart money is accumulating.
One sentiment indicator are the Rydexers, or as I like to call it, dumb money bears. To be differentiated, of course, from dumb money mutual fund buy & holders. The Rydexers hit an all time low (very bearish) versus the commercials hitting an all time high.
Hmmm.
In the trading environment, I really don't see the overwhelming sentiment as indicated by AAII. I read multiple newsletters, visit different chat sites, and so forth. By far, the majority seem more bearish than bullish. Top calling is a favorite past time. May be they're right, but they haven't been so far.
Anyways, I posted the following on a different site about My Beef Against Contrarian Sentiment:
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 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.
In the end, Contrarian Sentiment is inexact and hardly even qualifies as Technical Analysis. Give me HARD EMPIRICAL evidence as to when one side's supply of money is exhausted. That should be goal of Contrarian Sentiment.
SHOW ME THE MONEY! |
