Investor sentiment

Investor sentiment

Investor sentiment is a contrarian stock market indicator.

By definition, the market balances buyers and sellers, so it’s impossible to literally have ‘more buyers than sellers’ or vice versa, although that is a common expression. The market comprises investors and traders. The investors may own a stock for many years; traders put on a position for several weeks down to seconds. Generally, the investors follow a buy low sell high strategy. Traders attempt to “fade” the investors’ actions (buy when they are selling, sell when they are buying). A surge in demand from investors lifts the traders asks, while a surge in supply hits the traders’ bids. When a high proportion of investors express a bearish (negative) sentiment, some analysts consider it to be a strong

signal that a market bottom may be near. The predictive capability of such a signal is Market trend. Thought to be highest when investor sentiment reaches extreme values. Indicators that measure investor sentimentmay include:

  • Investor Intelligence Sentiment Index: If the Bull-Bear spread (% of Bulls – % of Bears) is close to a historic low,

it may signal a bottom. Typically, the number of bears surveyed would exceed the number of bulls. However, if

the number of bulls is at an extreme high and the number of bears is at an extreme low, historically, a market top

may have occurred or is close to occurring. This contrarian measure is more reliable for its coincidental timing at

market lows than tops.

  • American Association of Individual Investors (AAII) sentiment indicator: Many feel that the majority of the

decline has already occurred once this indicator gives a reading of minus 15% or below.

  • Other sentiment indicators include the Nova-Ursa ratio, the Short Interest/Total Market Float, and the Put/Call

ratio.

Market capitulation

Market capitulation refers to the threshold reached after a severe fall in the market, when large numbers of investors can no longer tolerate the financial losses incurred. These investors then capitulate (give up) and sell in panic, or find that their pre-set sell stops have been triggered, thereby automatically liquidating their holdings in a given stock.

This may trigger a further decline in the stock’s price, if not already anticipated by the market. Margin calls and mutual fund and hedge fund redemptions significantly contribute to capitulations. The contrarians consider a capitulation a sign of a possible bottom in prices. This is because almost everyone who wanted (or was forced) to sell stock has already done so, leaving the buyers in the market, and they are expected to drive the prices up. The peak in volume may precede an actual bottom.

Changes with consumer behavior

Market trends are fluctuated on the demographics and technology. In a micro economical view, the current state of consumer trust in spending will vary the circulation of currency. In a micro economical view, demographics within a market will change the advancement of businesses and companies. With the introduction of the internet, consumers have access to different vendors as well as substitute products and services changing the direction of which a market

will go. Despite that it is believed that market trends follow one direction over a matter of time, there are many different

factors that change can change this idea. Technology s-curves, explained in the book The Innovator’s Dilemma, states that technology will start slow then increase in users once better understood but level off once another technology replaces it, proving that change in the market is actually consistent.

Etymology

The precise origin of the phrases “bull market” and “bear market” are obscure. The Oxford English Dictionary cites an 1891 use of the term “bull market”. In French “bulle spéculative” refers to a speculative market bubble. The Online Etymology Dictionary relates the word “bull” to “inflate, swell”, and dates its stock market connotation to

1714.

One hypothetical etymology points to London bearskin “jobbers” (market makers), who would sell bearskins before the bears had actually been caught in contradiction of the proverb (“don’t sell the bearskin before you’ve killed the bear”)—an admonition against over-optimism. By the time of the South Sea Bubble of 1721, the bear was also associated with short selling; jobbers would sell bearskins they did not own in anticipation of falling prices, which would enable them to buy them later for an additional profit.

Another plausible origin is from the word “bulla” which means bill, or contract. When a market is rising, holders of contracts for future delivery of a commodity see the value of their contract increase. However in a falling market, the counterparties—the “bearers” of the commodity to be delivered—win because they have locked in a future delivery price that is higher than the current price.

Some analogies that have been used as mnemonic devices:

  • Bull is short for ‘bully’, in its now mostly obsolete meaning of ‘excellent’.
  • It relates to the common use of these animals in blood sport, i.e. bear-baiting and bull-baiting.
  • It refers to the way that the animals attack: a bull attacks upwards with its horns, while a bear swipes downwards

with its paws.

  • It relates to the speed of the animals: bulls usually charge at very high speed whereas bears normally are thought

of as lazy and cautious movers—a misconception because a bear, under the right conditions, can outrun a

horse.

  • They were originally used in reference to two old merchant banking families, the Barings and the Bulstrodes.
  • Bears hibernate, while bulls do not.
  • The word “bull” plays off the market’s returns being “full” whereas “bear” alludes to the market’s returns being

“bare”.

In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as the herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also sometimes described as a bull run. Dow Theory attempts to describe the character of these market movements. International sculpture team Mark and Diane Weisbeck were chosen to re-design Wall Street’s Bull Market. Their winning sculpture, the “Bull Market Rocket” was chosen as the modern, 21st century symbol of the up-trending Bull

Market.

Criticism

The concept of market trends is inconsistent with the standard academic view of the price movement of the financial

markets, the efficient-market hypothesis.



Leave a Reply

Call Now Button