The Difficulties of Measuring Sentiment

Something to keep in mind kids…

Its impossible to precisely measure market sentiment.

Compare it to measuring market behavior.

There is only one way to measure market behavior but we can do that with total precision. Look at a chart and we know the high, low and close over multiple time frames and also the exact amount of that behavior or volume.

Now, lets think about sentiment for a moment.

We have multiple ways to purportedly measure it (put/call, $VIX, AAII, anecdote etc) and yet none of these methods are precise. Sentiment is an internal process and even one individual can only inexactly verbalize a feeling much less tens of thousands of individuals. There are construct limitations too as all of these measures are not actually measuring sentiment itself but only a shadow of it (implied volatility etc).

I bring this up based on two noteworthy yet opposing data points published today.

First, here’s a quote from the brilliant Jeff Gundlach:


This is Jeff’s appraisal of market sentiment and he views it as complacent.

Next, here is this morning’s AAII Sentiment Survey Numbers:


These numbers show below historical average bullishness despite the continued rally in US equity indices.

There’s value in every observation or measure depending upon how it is incorporated just be aware that sentiment observations both qualitative and quantitative are only indirect observations, inexact and distorted by multiple factors.

ht: Doug Kass for the Gundlach quote


Best of StockTwits Charts: Banks Taking Leadership Edition

The financials are arguably the most important sector. The view goes that the health of the banks relates most directly to the health of the economy in general.

Today is one of those days where we are seeing breakouts galore in the sector and outperformance with the $SPX up .79% and the $BKX up 1.6%.

Here’s a few studies from the StockTwits Charts Stream which highlights the goodness:

1. Citigroup ($C) gapped 4% higher on the first day of the trading year and has not looked back. It now trades up 25% YTD and crossed 50$ this afternoon for the first time since January 2011.

@rafitax captures today’s gap, flag and rip that represents such strength simply and clearly:


2. @swingtradealert succintly describes the move in Goldman ($GS) writing, “Clean break out above trend line. Looks beautiful to those who are in it…” Indeed:


3. @traderstewie has been all over Bank of America ($BAC). He notes, “powerful move. Wants 14$,” and posted this chart capturing the inverted head and shoulders, the clean break out and today’s follow through also making two year highs:


4. The regional banks are also breaking out and to some they offer less exposure to too big to fail risk. @ivanhoff posted this one of  The Regional Bank ETF ($KRE) now making 4yr highs:


5. Popular ($BPOP) is one regional in particular worthy of note. It has been going sideways for 3 months and looks about ready to break above the horizontal channel. Here’s @NextTrade1122’s $BPOP chart for your consideration:



Fridays with All Star Charts: 051013

On the video this Friday afternoon, JC Parets and I talk $SPX levels, the rotation out of defensive names and into energy and materials, the long Europe short Latin America trade, the Yen, bonds, Utes and the Miami Heat.

All goodness for the peoples. Have a great weekend….



When An Asset Breaks, Then Its Broken

Never let me slip cause if I slip then I’m slipping – Dr. Dre

There’s one great lesson for newer traders in the price behavior of gold and Apple that is easy to understand but more difficult to respect.

When an asset that has had a great run breaks, its broken, and there is not enough wishing in the universe that can ever change that.



Reflexivity & The Employment Numbers

Back in early March when the Dow Jones Industrial Average and Transports were making all time highs, I wrote a piece about reflexivity and the new highs:

Executives at large companies who observe the broad market making new highs and their own stocks doing well will have a tendency to grow more confident in the economy and their own businesses and confidence has been sorely lacking.

This, in turn, might lead them to be more aggressive in conducting business and, importantly, to do more hiring than they might have otherwise. More hiring would positively affect the economy, increasing consumer spending, confidence and the like.

We may also see reflexive investor behavior. The market goes up and people become more attracted to it as they observe others increasing their wealth. This, in turn, leads to more investors getting involved and further increases in equity prices.

Last Friday’s employment numbers are a critical part of this virtuous reflexive dynamic..

The numbers improve and executives shift, again, ever more from the fear posture towards the aggressive posture where they are more likely to make new hires in turn leading to an improving employment picture…

Reflexivity at your service…


Reflexivity and New Highs

Reflexivity, Financial Markets & Economic Theory



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