New Concept: Intermediate versus Long-Term Sentiment
Understanding market sentiment is crucial; there is no advantage in thinking and trading like everyone else. Any successful fund manager must use skill and methods to find variant views with attractive risk/reward. This contrarian style is so popular that everyone claims to be a contrarian!
Many of my trading friends and former associates would be great on a CNBC interview. There is a standard technique, mastered by anyone who is intelligent, articulate, and who has read the morning issue of the Wall Street Journal. When doing an interview it is important to be glib and know why the market was up twenty yesterday, even if it did not suit your position.
But good interviews do not necessarily lead to successful results. In today’s edition of The Edge, (subscription required, and worth it), Doug Kass relates one of his charming and insightful Grandma Koufax stories. Here is a key section:
It is crucial to develop a variant view in putting together your
portfolio in order to differentiate your returns from those of the
majority of investors. Wall Street research is still steeped in
group-think mentality; therefore, if you think outside the box, your
chance of having investment success increases.
Part of his variant view is Doug’s analysis of market sentiment, where he often cites bull/bear ratios, hedge fund long/short ratios, or volatility to show that sentiment is bullish. This is often useful if one is making a short-term trading call — frequently Doug’s point.
At "A Dash" we have a different view, one that is also at odds with the general market tone. We see a multi-year cycle of negativity. Can this be true even when traditional sentiment indicators are bearish?
Technical analysts often distinguish between short-term, intermediate-term, and long-term trends.
Why not think about sentiment the same way?
Paying attention to underlying fundamentals like earnings and interest rates provides a firm foundation for assessing risk and reward. The key to this approach is that conventional sentiment measures refer only to those who are currently invested in the market. If all of the current players are bullish, there is no additional money to buy stocks.
The conventional indicators, however, ignore fresh money. At "A Dash" we think about individual investors who are overly-committed to real estate, foreign investors who have little exposure to U.S. equities, mutual fund managers who have chased returns abroad, and hedge fund managers caught short.
In times of serious market over-valuation, these groups were "all-in." Not now….