Mastering the Stock Market: High Probability Market Timing and Stock Selection Tools

CHAPTER 3

Sentiment Analysis

The first two chapters covered sector and seasonal analysis. Now let's look at one more important form of analysis: sentiment or consensus studies. I am sure you have heard the term contrary opinion. As a trader, whenever there is a strong consensus, especially output from the media as the market has remained or been in a strong trend, I become interested in looking at taking an opposite position from what the media are projecting. In other words, after a market or stock sector has had a long up move with a sharp price appreciation over a sustained time, this is when it gains the attention of the media. The paradox is that most people receive this information and want to buy to join an already established trend; thus, perhaps this is why many people tend to buy high or buy near an all-time high of the market. We follow market sentiment indicators because they do help identify market tops and bottoms.

The sum of a market participant's expectations as a whole is what helps derive market sentiment or a consensus of the market. A contrarian takes the opposite side of the masses. To be truly successful is to time the peak of an extreme opinion of a market's value.

As such, examining contrary opinion is part of an integral approach of investing and trading in the stock, exchange-traded fund (ETF), or commodity market. After all, everybody can't be right. A good analogy is, if everybody on a ship switches to the port side of the vessel, a strong chance exists ...