Investor sentiment is the view of the market by investors. This is the combined view of all investors at any one time. Since this is not static, but rather always changing, investor sentiment is usually seen in three general categories: extremely optimistic (bullish); extremely pessimistic (bearish); and neutral or equal in number of optimists and pessimists. The view of investor participants can be based on either fundamental or technical reasons.
Investor sentiment is seen as moving the main indices, which will push individual stocks in its wake. For example, a company might not be a great stock, but if the investor sentiment for the overall index is extremely bullish, this optimism will push up the price of most, if not all, stocks. Many view extreme market sentiment readings as a contrary indicator; when most people are bullish (optimistic), the market is close to a short-term top and vice versa.
Just the other day, I was talking to a friend of mine who seemed extremely cheerful. I asked why, and he said that his investments have performed well over the past few months and he saw no reasons to worry. This is a common problem with investor sentiment; people tend to become complacent and only look to the recent past as an indication of what tomorrow will bring. This is quite dangerous. Investor sentiment is often wrong and can be used as a contrary indicator, buying when others are dumping their stocks and taking profits when others are blissfully unaware of the changing land ... Read More
This past weekend, a friend of mine made a statement that there must be a large amount of economic growth coming shortly because of the booming stock market, driven by investor sentiment. As I told him, the two are not necessarily tied together. Over the past few months, we have heard about how economic growth is about to accelerate here in America, and this has helped drive investor sentiment in the stock market higher. However, I think there are many questions that need to be answered before we can assume economic growth will reach escape velocity, and investor sentiment is heavily contaminated with a large addictio ... Read More
One of the most difficult things for an investor to do is look beyond the current environment. One of the biggest reasons that many investors underperform is because of their own human biases. This is perfectly natural, as we tend to expect more of the same in terms of what has been recent history. In this way, investor sentiment becomes far too complacent. Is there a way that you can take advantage when investor sentiment is causing the markets to be mispriced? Absolutely, but you first need to have an understanding that this is indeed occurring. A perfect example over the past couple of years has b ... Read More
As many people know, one of the hottest areas in the market right now is technology stocks. Investor sentiment has continued piling into this sector—with good reason in some cases. The danger for investors is when investor sentiment becomes too bullish—technology stocks might be entering this territory. The latest of the technology stocks that has announced it is going public is the Chinese powerhouse Alibaba Group. Started in 1999 by a former English teacher, the company has now grown to be the largest e-commerce company in China and will soon be a public firm with a valuation of more than $140 billio ... Read More
Today, I’m going to talk about the technical picture and what to expect going forward. At the start of the year, I would have been somewhat surprised if you told me the small-cap sector would be in negative ground at the end of the third quarter. Small-cap stocks and technology fared the worst in September. Small-caps continue to be vulnerable, with the Russell 2000 retrenching 6.19% in the month and down 9.22% from its high. The small-cap index is again nearing the official 10% correction and reversal point, based on my technical analysis, which it ran into earlier in the year but managed to recoup. ... Read More
Investing isn’t all about managing returns; it’s also about managing risk. Risk is high right now in all categories: real estate, stocks, bonds, currencies, and even cash. On the cusp of a new earnings season, the stock market is going to be very choppy, but I do think that it will trend higher. There is no real need to be buying this stock market. With so much uncertainty and so many risks beyond your control, the sidelines are a good place to be. But the powerful breakout of blue chip and transportation stocks at the beginning of the year is very meaningful. Of course, many stock market investors have been sitting on the sidelines for a long time. This was the case for institutional investors unti ... Read More