Using Sentiment as a LT Entry/Exit Point

[Bullitt]

It's been said that one should buy when others are fearful and sell when others are greedy. The underlying theory is that all the good news comes out at the top while the bad news comes out at the bottom. When things are so bad you're ready to give up, the slightest piece of bull food can spark that monster rally out of nowhere. I'm sure we've all found out at least once first hand that it's much easier said than done to buy when others are fearful in this past downturn alone. However, in hindsight, there have been times that I've gone to the well when I deemed the market to be fearful, only to be burned on the next drop. The question is: How can we, as retail investors, decipher whether the herd is in an absolute bearish selling fear or when they are in a bullish state of complacency?

Using various sentiment indicators such as TSP Talk's Weekly Sentiment Poll, the AAII bulls/bears readings, etc., an investor/trader can use sentiment somewhat to their advantage. Below is a chart courtesy of Tom that I very rarely see when it comes to 'senticators'. I'm guessing the reason being is that most 'investors' view the long term as 90 days while this chart captures the complete market cycle which could take upwards of 10-15 years.

I intend for this thread to be used by TSPTalkers in articulating what they perceive to be the current emotional outlook of the herd. This is in the hopes that all of us can find some way to benefit. I think this thread would be most beneficial if members would refrain from their own personal opinion of the market, and focus more what stage they believe the herd is currently in. I don't intend for this thread to be a silver bullet by any means but merely another tool to put on our belt.

http://www.tsptalk.com/images/emotions_cycle.gif

[Bullitt]

It's a tough call but I think the herd is right around that trough area between depression and hope but leaning more towards hope. Here's my reasons for the herd being in a current state of Hope:

1. It's ancient history now that Buffet is buying which may be brining some investors back into the market alone. Money Magazine this month said 'Buffet is buying' at least 5 times.
2. Conventional wisdom also states that markets are subject to an end of the year 'Santa Rally' which may have formed a short term bottom for stocks.
3. The transition to the new President will occur in only a few weeks.

[Minnow]

Non opinionated Emotional Outlook of the Herd -- Hope.

For the reasons you mentioned plus the urge to "keep your chin up" and to "put on a brave face" even though you know the truth because the herd has seen their own latest financial statements.

[Birchtree]

The percentage of stocks in the S&P 500 trading above their 50-day moving average remains at a paltry 3%. Perfect for a contrarian perspective.

[XL-entLady]

It's a tough call but I think the herd is right around that trough area between depression and hope but leaning more towards hope.
I really hope you're right, Bullitt. :o Because when I looked at the chart before reading your comments, I was thinking that I'm not sure we've been through "Despondency" yet. In fact, I was thinking that maybe we are finally past "Panic" and possibly at "Capitulation." :( I like your position placement better! :D

Lady

[CountryBoy]

I really hope you're right, Bullitt. :o Because when I looked at the chart before reading your comments, I was thinking that I'm not sure we've been through "Despondency" yet. In fact, I was thinking that maybe we are finally past "Panic" and possibly at "Capitulation." :( I like your position placement better! :D

Lady

I'm kinda like Lady on this "Despondency", but if the Big 3 gets bailed out then hope can spring eternal. :D I think we can get a Christmas bump especially if congress has some sort of stimulus package, but over all I'm still leery with credit card problems and more ARM resets in 2009. If the Big 3 gets bailed out and we get a pre Xmas Stim package, then we may have a rally thru January.

CB

[TRAFFIC_DOG]

I really think we're still back at capitulation, ready to slide into despondency with this next leg down. (which may come only after a fairly strong rally)

The capitulation is in the mindset that it is too late to exercise some control over the situation by harvesting some cash.

The herd has been trained well these last 20 to 30 years. They still have no idea how bad it COULD get. They really are too comfortable in the "knowlege" that the worst is behind us.

I really haven't heard anything approaching despondency yet.

Most comments I hear are:

"I don't care to even look at my balance"

"I really haven't lost anything until I sell"

"Oh well, I still have x number of years before I retire"

[Birchtree]

Sentiment is the clearest indication of why investors fail to keep the gains they make in bull markets. It has them buying more heavily at market tops and selling in despair near market bottoms. There are so many folks now bearish that is the most since December, 1994 - right before the 1990s bull market was about to accelerate to the upside in a big way. I'm buying as much as possible - I just had a buyout and I'll use that money to buy more equities.

[mick504]

Birchtree! I moved from 100% G to C a few days ago! I tried to buy in around 850 the S&P but George W. Bush had a press conference I wasn't aware of and the mkt turned around and I got in at about 911. Hope that isn't a bad omen! Anyway now the mkts around 859 today and I'm staying in for the long haul...up or down! I thought that was the idea; when things seem and are really bad we are to start buying in again...contrarian view. Higher unemployment lags the mkt....53,000 jobs at Citigroup...who needs them now anyway. Staying in and staying put! I agree with your writeup!

[Frixxxx]

Birch (my B&H preacher man!),

Looks like you have a new convert - mick.....Just hide the Kool-Aid and you should get a few more....

You gotta love those bounces at 8100/840 levels.....I think the pockets will dry up soon and support will be lost.
:cool:

But (I)'ve been wrong before~!

[mick504]

FRIXXX...it's not that I wanted to get back in at 911; but 850; however since I'm in I think I'll stay awhile! It it drops more which it may...so what! I don't want to be out and chasing the slow rise up. I'm retired and got the time. It's a crazy mkt from day to day! The 2 trades or 3 make it somewhat difficult so heck w/it...I'll stay put for awhile! I prefer Gatorade!

[XL-entLady]

I was thinking that I'm not sure we've been through "Despondency" yet. In fact, I was thinking that maybe we are finally past "Panic" and possibly at "Capitulation."
Okay, so we weren't quite as far along the curve as I was thinking. Because what I'm hearing and reading since 4 PM EST today sounds like "PANIC" to me! :( So we're not at capitulation yet. Maybe tomorrow? :worried:

Lady

[Frixxxx]

FRIXXX...it's not that I wanted to get back in at 911; but 850; however since I'm in I think I'll stay awhile! It it drops more which it may...so what! I don't want to be out and chasing the slow rise up. I'm retired and got the time. It's a crazy mkt from day to day! The 2 trades or 3 make it somewhat difficult so heck w/it...I'll stay put for awhile! I prefer Gatorade!

It's all good mick. I was just giving Birch a poke. I respect the buy and hold mentality. I understand the DCA process and use it in the currency market.

It all comes down to what YOU are comfortable with. From your comments it is implied that you aren't relying solely on TSP for your income.

Congrats on your retirement!:nuts:

[McDuck]

http://www.tsptalk.com/images/emotions_cycle.gif

I think we are still in the Denial phase. We'll be in Despondency when Birch tell everybody to go 100% cash.

[Bullitt]

I think we just moved from Hope back to Capitulation/Despondency today after the Big 3 and Citigroup antics. All guesswork on my part. A few guys at work were talking how they sold the day after the Pelosi-vote debacle and don't plan on getting back in until 'it's all clear'.

[Birchtree]

I'm feeling depressed but the 37 stock buys remaining on my current list are certainly cheaper after today and that includes C at under $7.00.

[McDuck]

I'm feeling depressed but the 37 stock buys remaining on my current list are certainly cheaper after today and that includes C at under $7.00.

They'll be cheaper in December.

[XL-entLady]

http://www.jasonkelly.com/uploaded_images/Trading-Emotions-734212.jpg


This is another chart of the type that started this thread. It was on the Jason Kelly site this morning. Brings the sections of the cycle into the read world. NOW where do you think we are in the cycle?

My guess is about today we'll see step #11, "I'm selling out and staying out." :worried:

http://jasonkelly.com/

Lady

[Gumby]

I'm feeling depressed but the 37 stock buys remaining on my current list are certainly cheaper after today and that includes C at under $7.00.

I'll be in at that level 100%:)

[Birchtree]

I'm pushing #14. The C I mentioned was Citigroup which is now selling for $5.08 - there just isn't any confidence in the banking sector. To me that is classic of a deep bottom and time to load up in preparation for the next three years.

[tsptalk]

This is another chart of the type that started this thread. It was on the Jason Kelly site this morning. Brings the sections of the cycle into the read world. NOW where do you think we are in the cycle?

My guess is about today we'll see step #11, "I'm selling out and staying out." :worried:

http://jasonkelly.com/

Lady
I like it!

[Bullitt]

Play it again Sam. What was today, our 5th or 6th 'Capitulation'?

We've lost 'Hope'.

[robo]

I'm feeling depressed but the 37 stock buys remaining on my current list are certainly cheaper after today and that includes C at under $7.00.

In October 1987 there were 35 S&P 500 Index stocks that traded for less than $10 a share. In the aftermath of the September 11th terrorist attack, 59 S&P 500 Index companies traded for less than $10 a share. Right now we are going through a similar situation.

Currently there are about 101 S&P 500 Index stocks trading at sub $10 a share. Unbelievably, one S&P 500 component, E*Trade (ETFC), closed below $1 a share. And there are 36 stocks trading below $5 a share. These are levels at which stocks are called “penny stocks”. You can find a table of the constituents, ordered by share price


http://www.tradersnarrative.com/

[Birchtree]

I'll keep buying as long as I can write my name in the snow - no hands.

[wv-girl]

I'll keep buying as long as I can write my name in the snow - no hands.
Snow? In Florida? All right, what have you been smoking? No wonder you are depressed?

[Bullitt]

Either we've seen capitulation or it is still in progress. October was a punishing month for fund managers and it's very difficult to make the argument that capitulation hasn't happened yet.


If you’re looking for evidence of a gale blowing through the financial services industry, you don’t need to look far:

Fund companies are liquidating a huge number of funds. When all share classes are counted, something like 400 funds have been liquidated so far in 2008. In the last month or so, fifteen Reserve money market funds have been wiped out. As has the entire Utopia fund family. Liberty Ridge, successor of the great PBHG funds of the 1990s, is going. Two of three Bjurman, Barry funds. The Sierra Club fund. Analytic Global Long-Short. RS Asset Allocation.

Fund companies, likewise, are liquidating a huge number of employees. The list of companies with substantial layoffs ranges from the industry’s smallest players to its largest.



American Century is laying off 17% of its workers
Ariel is laying off 20% of its staff
Fidelity is cutting 15% of its UK workforce and about 7% of its huge US staff
Janus announced a 9% workforce reduction
Legg Mason is cutting 33% of jobs at its Capital Management unit, the investment group headed by Bill Miller
MFS is laying off 5%
Putnam is laying off a relatively modest 5%, including 12 portfolio managers, though the changes are linked to changing corporate strategy as much as deteriorating economics.
The Hartford is laying off 500, about 2% of its staff
Waddell & Reed, adviser to the Ivy funds, is laying off 15%


Setting up "death watches" is becoming a popular pastime: Morningstar star, for example, started an "ETF Death Watch" to track the rising number of ETFs which are simply not economically viable. By some estimates, that number is creeping up toward 100 – perhaps 15% of all ETFs in existence.

Even reopened funds are experiencing outflows. The 66 funds that have reopened this year have posted a total of $24.3 billion in net outflows year-to-date through Oct. 31. ("More mutual funds reopen for business," Investment News, 11/16/08)
http://www.fundalarm.com/hilights.htm

[robo]

Either we've seen capitulation or it is still in progress. October was a punishing month for fund managers and it's very difficult to make the argument that capitulation hasn't happened yet.

http://www.fundalarm.com/hilights.htm


Bullitt,

Folks now want to see the new lows tested on volume before they have the good feeling about buying again. It's never easy picking a bottom is it?

Some comments from Steve below about todays action and yesterday's sell-off. Watched folks on the board sell again before the jobs number and the market rallies. Happened last month also.

"Global equities have been quietly forming a bullish pattern of higher lows." In advance of any widely anticipated bearish news, such as tomorrow’s U.S. unemployment report, frightened amateurs typically unload—and that was the case today. It’s a classic case of “sell on the rumor, buy on the news”.

We might get a retest of 740 folks or we also just might keep climbing the wall of worry and get higher lowers. How long will it take before you get buyer's anxiety and buy? Maybe just before the next sell-off... NO ONE CAN KNOW FOR SURE.....

How could the market rally with all this bad news today? Why isn't it selling off?

Ask optionman or coolhand why they both just went fully long? What the heck are they thinking?

Maybe we will sell back off next week, but if we keep making higher lows its Bullish for a short-term run into the New Year. WE SHALL SEE!

Take care and good trading!

I'm still playing by Bear Market rules for now....

[Birchtree]

Those few who made the painful decision to buy into the pullback are appropriately rewarded - the financial markets always rally dramatically following any true bottom, so that those who panicked on the way down are punished rather than rewarded.

[robo]

Those few who made the painful decision to buy into the pullback are appropriately rewarded - the financial markets always rally dramatically following any true bottom, so that those who panicked on the way down are punished rather than rewarded.


Yep - it never changes. The insiders get richer and Joe Sixpack goes to cash. He then buys back at much higher prices. I know two folks at work that sold very close to the new lows after riding down most of the sell-off.

The insiders are currently buying BIGTIME, and watch out when the whales start buying.


Yeah - we can test the lows again and we can also break-out. We shall see!



Take Care Big Bull!

[Bullitt]

http://www.tsptalk.com/images/emotions_cycle.gif


Have we hit the Relief stage yet?

[tsptalk]

I am in denial / fear mode, but I am still on the sidelines so I'd have to turn the chart upside down. :)

Relief sounds about right, although optimism and excitement are in the air.

[Birchtree]

I would think we hit the relief stage when we tack on a 5% 3Q GDP.

[KevinD]

Have we hit the Relief stage yet? Nope. The more I miss this rally the more depressed I get. :embarrest: :o I'm beginning to see no reason not to be all in.

[Bullitt]

I call 'Thrill/Excitement' stage here.

[Ship]

I call 'Thrill/Excitement' stage here.

Just so long as your not in "denial" it's all good! :suspicious:

[amoeba]

No Doubt:

this market is truely in denial. but who cares? as long as everyone else is in denial, they will load up. until they can no longer deny the fact that there is no economy, just one big printing press and a lifetime supply of green ink, or is it red?

[Bullitt]

We won't be in denial for a while. Not until the true believers in things like 'GM's Success, and 'New Jobless Recovery" stop hammering the Monday futures higher.

[Bullitt]

Unless we still have a blowoff top coming (though with everybody looking for it, I don't see it coming) I'm calling the Denial Phase.

How funny would it be if GM got hammered by 'vicious short sellers' on it's IPO date?