Market Sentiment

I was having breakfast with a an “old” friend ( I don’t mean age ) this morning. I was asked how I felt about the current market situation. Generally , world market has been bullish for quite a while. Is it time or is it too late to get into the market now ? Can I open an trading account now ? Will I missed the boat ? These are some of the common questions people tend to ask … especially when market peaks to tops or bottoms.

That brings me to my discussion topic here - Market Sentiment. Sentiment is just another word for “feelings”. It is amazing how public “feelings” tends to be closely correlated with stock market price. In other words , very negative opinions are usually predominant during the bottoming phase of a market move , and , very positive opinions are usually prevalent during the topping phase of a market move.

Market sentiment is not a trading method which can be used independently. However , it is a valuable ” early warning system ” which can be used to alert traders that a possibly significant change in trend is about to develop.

We cannot trade the market using ” feelings “. While I must agree we are in a bullish sentiment today - That does not mean only buying , and it also does not mean no selling. I would still use my normal trading strategies to govern my trades , and use market sentiment as a general wind direction. There are opportunities in both directions.

Apart from the fact that sentiment tends to lead market tops and bottoms , the key reason for its value is that it appears to have some consistency. Sentiment is a measure of traders emotion. Since traders interpret the news or rumors that moves markets and since traders place orders , the traders are the ultimate mover of the market. Market condition changes everyday , human psychology and emotion does not. It is a market law. Sentiment will continue to be a valid indicator as long as people trade markets and as long as markets move as a fraction of trader reaction.