How to Measure Sentiment

Barry Ritholtz, as usual, has his finger on the pulse of an important market question: How to measure sentiment.  In particular, how to determine whether widely known information is already factored into the market.  Take a look at the excellent list of sentiment indicators for traders, and then come back for our take.

Link: Contra-contrarian ?.

Several emailers asked the following related questions:How can we have a sell off in September if everyone is expecting it? Another variation of this was: There’s been so much discussion about the 4 year cycle, isn’t it less likely to have any impact?We …

Barry is quite correct in questioning whether various cycles have been anticipated.  Read the comments as well, and you will see the suggestion that hedge fund managers, who control the marginal dollars, have already anticipated these moves.

To his "Dogs of the Dow" example, we might add the "January Effect."  This worked very well for a while, but traders started anticipating the moves.

At "A Dash" we believe that the ultimate sentiment indicator is market valuation.  Take a look at where we stand versus five years ago.  While this is not the tool for making 5% in a month, it is a good way for the individual investor to be on the right side of the market for major moves, many times the short-term gains.

Why is market valuation a better sentiment indicator than those on Barry’s list?  His list focuses on those who are currently in the market.  Only the mutual fund flows shows money coming from other asset classes into stocks.  Unless the individual investor is monitoring these statistics closely, it is wise to consider the overall market value.