The world of trading is wide, long, and deep, full of technical jargon, complex analysis, and often mind-challenging tools. The reality of this world, though, is that it is human-centric, which has its own set of complexities, however, the fact that the world of trading is simply humans buying and selling markets, makes it predictable in the most general sense. This, then, makes people one of the most accurate indicators available to us.
When others are greedy, be fearful; when others are fearful, be greedy – Warren Buffet.
Although Buffet is not a trader, he is, arguably, the best investor in our lifetimes, so the meaning of his quote is worth considering …
I have stated repeatedly that understanding the big picture is one important key to becoming a successful trader. The elements of the “big picture” are many, but one is sentiment, the prevailing “voice” of the people. Although sentiment is a double-edged sword, if one learns to read it well, it can be a valuable indicator for your trading toolbox.
One side of the sword is the view of the contrarian, which is represented in the quote from Mr. Buffet. If all the sentiment is chasing a market, sell. Do you remember the technology sector in 1999? Think all the way back to oil in 2008. Is gold a good trade today? Contrarians have always traded away from the prevailing sentiment, and the philosophy is still going strong. The truth is what goes up must come down, and vice-versa. The truth is one of the primary drivers of market prices going up or going down is the common “belief” or “perception” of any market’s value, and when the common belief or perception is “get on the bandwagon now, or else …”
The most common cause of low prices is pessimism – Warren Buffet.
The second Buffet quote above represents the other side of the sword, which is the sentiment before the bandwagon begins rolling along. That sentiment is measured in surveys and confidence indexes. These are many, but some are key, such as the weekly survey of the American Association of Individual Investors (AAII), which asks its 150,000 members if they think the market is bearish, bullish, or neutral. Another is the Investors Intelligence survey, which subjectively measures the sentiment of some 130 investment newsletters. Each week, the Market Vane surveys leading market advisers and commodity trader advisers. Every month, Merrill Lynch surveys some 200 money managers around the world to ask about their economic and market outlooks.
Yale University produces a series of confidence indexes, including the One Year Confidence Index, the Buy-on-Dips Confidence Index, Crash Confidence Index, and Valuation Confidence Index. Check out the Ned Davis Crowd Sentiment results (think about the other half of the sword). This respected research organization attempts to put the current market in perspective by tracking a proprietary combination of sentiment surveys, as well as the “signals” emanating from the options market (think back to Friday’s article). Of course, one of the most quoted sentiment surveys is the University of Michigan Consumer Sentiment Index. Since 1946, this survey has tracked consumer sentiment, and since consumers make up some 70% of the U.S. GDP … Finally, the State Street Investor Confidence Index tracks the movement of its $15 trillion in institutional assets. In a monthly reading, released on the second-to-last Tuesday of every month, the index measures the confidence of its institutional investors.
Each of these indicators is helpful alone, but together, all form one solid indicator that we should be watching. Never forget, markets move because people make them move. Thus, the ultimate indicators are those that track peoples’ perceptions and beliefs. Come to think of it, in reality, this is what every indicator is about, ultimately.
Trade in the day; invest in your life …
