Jin - Market Sentiment

As a committee member of my school’s investment club, more often than not, I have to attend to investment talks by professionals. These talks range from real basics of the stock market to more in depth stock analysis. Frankly, such talks are rather dull. However, they have something in common, especially talks about fundamental and technical analysis. In the later part of their presentation, they will always conclude by highlighting that the most important thing about the stock market is the market sentiment.
I find this amusing. The professionals seem to contradict themselves with their presentations. So does that point mean that whatever analysis or factors were considered in front are useless? It is weird that professionals will speak so much about structured analysis even when they do know that market sentiment is the most important. Yet there is hardly any concrete approach or analysis made on market sentiment. To be fair, grasping the market sentiment is arguably the hardest thing to do in the stock market. This is probably why I admire Jesse Livermore the most.

Nonetheless, it is always important to try to understand market sentiment and I will attempt to make a bold yet plausible approach to understand today’s market. An important point to understand is that market sentiment doesn’t change everyday. It goes on for a long trend until one of two extreme moods kick it; “Crazy” and “panic”.

Stock Market Definition
Crazy: a period of time where everyone is frantically buying anything!
Panic: a period of time where everyone is selling like there is no bottom in sight!
Traditionally, fear and greed are terms associated to the stock market. But I feel that both emotions are represent a normal state of mind. It is alright to be fearful or greedy at times but things start to change when one gets crazy or panicky.

Moods
Most importantly, “crazy” and “panic” mark the end of a market sentiment trend. Surprisingly, when everyone is panicking, it is the best time for you to enter the market. These are the only two extremes that we will be working on. It reflects trading styles too. It is almost impossible to day trade. Good traders trade the whole trend and it doesn’t mean that they trade from the very bottom to the very top. They attempt to decipher the market sentiment and will capture the bulk of the sentiment trend. Other than that, they are just normal investors. When it is time to long a couple of positions and sleep at home, they jolly well do so.

Irrationality
It has always been my belief that the market is irrational. While it is probably true that the stock market leads the economy (I always hear that it leads the economy by 6 months), it can also be argued that currently, the stock market is in denial about the state of the economy or is hopeful. Eventually, understanding that the stock market is irrational, there is one important factor to consider in grasping the market sentiment – underlying or real economy status. My point is that it will be justified for a stock market to shoot up like a rocket provided the “reality” justifies it.
Understanding the economy is an art and I believe Kenny will bring you through the economy status in the following weeks.

De Ja Vu
It has been my stand that our economy is not really picking up. I am not going to throw any figures over here because there is always two side of the coin regarding figures.

On hindsight, it was easy to label “panic” with those green arrows. The first green arrow marked the bottom of 1929 crash, where there was this huge panic selling day. In my opinion, I really thought that the market had bottomed at the 2nd green arrow back then in November 2008. Nonetheless, the real bottom occurred in March 2009. Purple arrows signify a period of hope or denial. But do take note that hope or denial can turn into real hope. A really a thin line separates them.

1929 and 2008
I would like to draw parallels between 1929 and today price line. The difference is obvious. The process in 1929 was really fast. Transition from rapid selling to rapid buying happened in matter of months. The recent market meltdown was a long painful process. Even the “recovery” stage stretched through a period of time. Nonetheless, the similarity between both is interesting. The degree of the recovery period is more significant than that of 1987 (purple arrows). I will not discuss more about 1987. If you could do someone were to research further on the crash, it would be apparent that there wasn’t any strong economy weakness that underlies the crash. Reasons such as programmed trading have been cited to explain the crash (I tend to disagree). The recovery stage of 1987 is of greater significance. It was a slow and steady process and this is very important. A bull market is a dull market. Volatility is low, gains are low everyday. You don’t see 5% gains happening at all. But the crazy stage of bull market will give you that number.

Sentiment Today
It is about taking a stand. My stand is simple. The underlying economy is weak and the stock market is moving upwards normally because participants are hopeful. It takes a while before they realize that the underlying economy is weak. When will that crystallize? It comes down to how the market is moving. As of now, I don’t see any volatility yet. Gains are representative of that in a bull market. That being said, we probably have quite a bit more for on the upside in the market despite recent dips. But bear in mind that we are bound to head down and when more people are starting to buy, where gains are posting greater numbers each days, the crazy stage would have been reached.

An important sign for everyone to recognise about the stock market today is the trend of US dollars. A question that I will like to throw at you is, "Whether the stock market is moving up or down because of the facts and numbers that we are seeing or is it simply because the US dollar is moving up or down inversely with the stock market."