Question for Mark Young about Sentiment

I am still relatively new to trading and am buffled with the market sentiment. If more people are bearish and more people are trying bring down this market, would it not be natural for the market to go down? How can it go up?

Well, ask yourself this question: If you are Bearish on the market wouldn't you have already sold (or gone short)? If that's the case, then your money is potential fuel for the market to rally on, not decline on. Does that make sense? Mark

You can expand on that a bit more, I think.. Short sellers tend to be far more nervous than bulls, because the long term drift of the market is up. Hence they're not the "buy and hold" types. If the market goes against them, they'll run for the hills while your average bull can just sit it out. That's why short squeezes are very powerful. You get enough shorts piled on, you can get a helluva rally from the fuel mark's talking about. At some point, those short sellers give up and turn to bulls, but they don't have the same level of conviction as the stronger bulls. That becomes the weak point because you give em a little down side, those same recently converted bulls are the most nervous and sell off. Current sentiment is that theres a lot of bears "more than historical norms" for all time highs. So it is more dangerous to short here than one would suspect by looking at the position polls.

Thanks. But if more sellers cannot bring down the fewer number of bulls, how does the market ever go down? I thought the volume was an important factor in the movement of the market.

Thanks. But if more sellers cannot bring down the fewer number of bulls, how does the market ever go down? I thought the volume was an important factor in the movement of the market.

Usually if you break a major trendline, that causes a major reaction. We're not close enough yet. But you can easily spot that trendline for the indices.

Thanks. But if more sellers cannot bring down the fewer number of bulls, how does the market ever go down? I thought the volume was an important factor in the movement of the market.

Ah-Ha! I think I see the source of your confusion. A lot of the sentiment we're looking at is more unsophisticated money or at least "smaller money". Big institutions get money every day and they generally have to put it to work within some large parameters. So, with the market making new highs they and other "structural" investors will be under some pressure to apply marginally greater amounts of cash to the market. Meanwhile, we have lots of speculators who have already sold or are short and who will soon be forced to cover, adding more demand.

Now, at some point, all the factors that got that money into the market will be understood and everyone will have committed not just what they should have committed, but perhaps a bit more in order to try to beat their peers or sneak out a little extra performance. Now, as mentioned above, there's structural investing constantly going on, and even with almost everyone fully committed, there's new money coming and unless there's a reason to shift out of stocks, the market can just drift higher on the marginal demand. That's why tops are built over a much longer duration than bottoms, too.

Anyway, what typically happens, is this. After everyone is pretty confident and now about as exposed or more exposed to equities than they should be, there will come some news or some development that causes some concern. Now, investors aren't fast to sell. They'll hold on for a while. Some will hold on forever, in fact. But some will start selling. Paring back. The market will back off. Then there'll be some dip buyers who push it back up, but those lingering worries will remain and thus there will be a bit more selling. There might be some other development that investors might think offsets the first worrisome development, and they might buy the market back up again. This will repeat in various and sundry ways as a top is built. Over this time, sentiment will start showing more Bearishness even as stock prices barely decline. At some point, the investors start wanting to move out of the market more aggressively, but the problem is that all the demand that was there before isn't. The Structural Buyers are allocating a bit less money to stocks now, and the more nimble are liquidating but the dip buyers have already bought and the shorts have already covered. Now, a real decline can get going because it has fuel. The sentiment will invariably be misunderstood at that point to be Bullish, when in fact it won't be Bullish until the prior built up supply is spent and new fuel for an advance is built up.

So, too much Bearishness in a rising market that hasn't yet seen excessive Bullishness is Bullish. After everyone has gotten Bullish, however, a rise in Bearishness is actually often Bearish. We're in the former situation currently.

I hope that helps.



Mark

Thanks, everybody. Now I have a little better understanding.

The absolute key thing to remember is that there isn't a simple linear relationship between sentiment and market action. Tops are different from bottoms and the excesses in sentiment rarely correlate with similarly excessive moves in the market (i.e., e.g., everyone Bullish might only result in a modest decline, rather than a large one). Mark

it looks now like an 'event' is needed to turn the trend... election, terror, war, or some such the mutual fund managers that are lagging will want to close their fiscal year 10/31 strongly, thus buying on any slight pull back when we had the spx p/c at 3.53 tuesday, it did seem obvious that TICK.NY would go +1000 five or ten times in response i hear one commentary from the SP futures pit, and he said they 'want 1400', he said they would react bullishly to the fomc decision, and so they did record short interest being reported this week also today we have DRG off -1.5% a big weight, and big weights starting weak MSFT(earnings tonite) CSCO TXN QCOM BTK biotech strong +1.7%, didn't Mark post an IBB $weight p/c of 8.99 the other day

it looks now like an 'event' is needed to turn the trend... election, terror, war, or some such

the mutual fund managers that are lagging will want to close their fiscal year 10/31 strongly, thus buying on any slight pull back

when we had the spx p/c at 3.53 tuesday, it did seem obvious that TICK.NY would go +1000 five or ten times in response

i hear one commentary from the SP futures pit, and he said they 'want 1400', he said they would react bullishly to the fomc decision, and so they did

record short interest being reported this week also

today we have DRG off -1.5% a big weight, and big weights starting weak MSFT(earnings tonite) CSCO TXN QCOM

BTK biotech strong +1.7%, didn't Mark post an IBB $weight p/c of 8.99 the other day

"it looks now like an 'event' is needed to turn the trend... election, terror, war, or some such"........yup ...aint that great?....5000 pts up during all dat terror n ********.....snort