Investor Sentiment Is Key When Analyzing the Financial Markets

Investor Sentiment Is Key When Analyzing the Financial Markets


FLASH: Investor get excited by higher prices for financial assets. If prices of stocks 2X, it is likely that investors will want them more, and the more they go up, the more investors tend to want them, this is known as “fear or missing out,” or FOMO.

So, that is why gauging investor sentiment is Key.

Analysts have forged sentiment indicators for a wide range of financial assets, not just for stocks.

But, may on Wall Street do not like them because they are not exacting indicators.

That said, it has always been my take that sentiment analysis works well at predicting future market moves along with technical analysis or fundamental analysis.

Of my many indicators there are 3 Key ones, and 1 of them is sentiment.

Probably the best-known is the survey conducted by the American Association of Individual Investors (AAIS). Thought is is not exact, it still works at the extremes.

There are many ways to track sentiment.

I measure it over the short, medium or long term, and by investor class.

I call mine The Bulls Vs The Bears, and have been measuring it weekly for 20 years now.

When the stock market was collapsing in December, measures of sentiment of managed money and active traders dove to unrepresented marks.

Retail investors were unfazed, as a net $22-B flowed into passive index funds during the frame, while the managed money exited to risk-off assets according the data.

Notably, retail investors have the tradition of always being wrong, buying high and selling low. This time though, the large parts of the stock market goes into what is considered to be the brink of the technical definition of a Bear Market, which is a decline of 20%, and retail investors are Bullish.

Retail investor looks different today from the Y 2001 retail investor that got hammered when the .com bubble collapsed. Instead of day trading stocks in a discount brokerage account, they have morphed into long-term index fund investors.

The coaching by index advocates over the last 10 years urged retail investors to invest passively in ETFs with an eye on the long term while minimizing costs, seems to be working.

Now, retail investors without a lot of financial knowledge or historical perspective are being conditioned to keep investing through major declines in stock prices or buying the dips.

Historically, there was a penalty imposed on the unsophisticated and the uninformed in terms of ROI.

Today, retail participants are outperforming professionals. These days, it is the retail investor who is tough, and institutional investor who cuts and run at the 1st sign of trouble.

The Big Qs: Are retail investors getting smarter; are sophisticated investors getting dumber?

The Big A: Yes

Institutional investors, particularly hedge funds could benefit from a longer-term outlook, which they might be able to achieve if they were able to obtain 5 to 10-year lockups from their participants. Having to provide Monthly or Quarterly liquidity forces many hedge funds to stick to index-hugging investments that can be easily sold in the event of redemption’s.

But, the retail investor can benefit from some framework of risk management, even simple stop losses, instead of having an unsophisticated view that stocks will go up forever. The hardiness of ETF investors might seem like an asset during a 20% correction, but a liability during a 60% decline from which such a Bear Market might not fully recover for many years.

Retail investors are taught and/or advised that the stock market “always comes back.” Which they do,.

Recent history has shown us that professional investors have had major challenged outperforming passive indexes.

But, 25 years ago, the Top hedge funds were making 3X digit returns and retail investors were not making much at all.

We here a HeffCap believe it is Key to always take what the market gives.

Have a terrific weekend

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