My Rant on "Sentiment"

I'm not picking on Eric, but there seems to be this obsession with trying to determine "sentiment" based on news stories or bloggers' entries. How can anyone determine if the market is overbought or oversold based on a few cryptic remarks by random people?

Every individual trader or investor is an isolated bubble of sentiment, a conglomeration of fear and greed... except that one guy at Goldman Sachs who decides to buy a zillion dollars of RIMM and then the Nazzy takes off with AAPL and MSFT following. Also, if Newsweek, with a circulation of tens of million, has a cover stating the recession's over, or Barron's talks up a stock, sure this might have a material effect for a while... but blogs? and Stocktwits? Come on, dude. I'm absolutely at a loss to figure how some jamoke on Stocktwits, or Slope of Hope, or IBankcoin, who trades maybe 2000 shares a day can be any indication as to how "the market" will move. Are they indicative of some large population of market-movers? Doubtful.

I think this is why technical analysis was invented. There is no way to predict anything based on an individual's biases, especially an individual who 1) you do not know and 2) trades too few shares to matter, and 3) influences almost nobody, and 4) might change their mind in 30 seconds.

There is no way to really "know" where the market is going. To chase alpha, one has to play the odds: 1) buy high and sell higher, or 2) short sell low and buy back lower, or 3)perhaps hardest of all, find the elusive reversal. That's it. Those are the only three ways to make money in the market. Which scenario has the highest percentage? Certainly not throwing money at reversals... fighting the trend is a fool's game and the odds are stacked against it.

Sentiment cannot be determined any reliable way except to look at charts. Period. And even then, it's really playing percentages. If a stock breaks above it 20-d moving average, or above it's 50-d high, what are the odds it will tick up still more? 51%? 70%? That's the game traders play.

Reversals can be found, but for every successful call that makes $1000, there might be 5 false calls that each get stopped out for a loss of $198. Can you make money? Sure, but it takes eternal diligence and you have to take every reversal call on the chance it's the "big one."

Sentiment can be determined, but is it actionable? Was the NASDAQ euphoric in 1999? Absolutely. It was euphoric in February 1999 at 2300, and it was euphoric in July 1999 at 2800, and it was definitely euphoric in December of 1999 at 3600. If you had shorted that market looking for the elusive reversal in February, you would have been sweating bullets with a 100% loss by March of 2000 when the Nas hit 5200.

So where are we now? Sentiment cannot be determined with any confidence. Some people are really really bullish--- buy the dips! the recession is over!-- and others are really really bearish-- we're going bankrupt! the Fed and Treasury are incompetent!

The way to trade this sucker is to look for a trend and follow it. If there is no trend, then hedge or go to cash.

Other than that, just try to find safety in beta.