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Sentimentally Yours



Editors note: With this column we introduce Jason Goepfert, the founder, president and CEO of Sundial Capital Research, Inc. a company dedicated to the research and practical application of mass psychology to the financial markets. is a publication of Sundial Capital Research. He appreciates your comments and feedback at

Hello, fellow Minyans. I'm extremely excited to join the critters of Minyanville (oh, yeah... and the people too!), support some worthy causes and purge the writing bug that bit me several years ago.

My primary area of concentration is market sentiment on U.S. equities and, to a lesser extent, the (long) bond market. Researching aspects such as option activity, short sales, mutual fund flows, investor surveys, breadth, volatility and others, I try to gain insights into how much comfort or uncertainty is built into current price levels.

Deciphering the attitudes of those in the market has been a staple of successful investors throughout history, from ancient Japanese rice traders to Jesse Livermore in the early 1900s, to current hedge fund managers. Perhaps the most important concept to grasp is that the "market" is not a thing -- it is a fluid reflection of individual attitudes and biases. As Gordon Gecko so succinctly tells us in the movie Wall Street, "Money isn't lost or made, only transferred from one perception to another." Markets, whether they be for stocks, bonds or pork bellies, present us with a way to assign a score to each of the various perceptions of the future that millions of individuals currently hold.

These perceptions are not always guided by calculated logic. Think about your own trading decisions for a moment: Have you ever had sweaty palms before calling your broker or hitting the "transmit" button? How about checking Internet message boards, trying to find out what everyone else thinks, so you can take comfort in being part of a group? If so, you are not alone. The roller coaster of emotions that you go through during the trading process are the same factors that influence those who trade millions of dollars every day -- maybe not to the same extent, but they are there. Feelings of euphoria after a big day, and depression after big losses, are common threads shared by traders of all stripes, regardless of years of experience or assets under management. It is a natural function of having hard-earned equity at risk, knowing that someone else (the other side of your trade) is trying to separate your from your money.

As news events, corporate earnings, economic numbers, etc. are released to the public, they shape the opinions of those in the markets as to the likely direction prices will take. When opinions are shaped to the degree that it seems everyone is speaking with the same voice, then that's when we need to be worried about a change in trend.

Sentiment, in all time frames, tends to be most effective when giving contra-trend signals. For example, if the trend on a longer-term (say weekly) timeframe is up, but the market has suffered enough of a correction as to create excessive pessimism among market participants, then it may be a good time to come up with a list of potential buy candidates. When there is a strong price trend, it becomes difficult to read too much into in-trend readings (oversold in a downtrend or overbought in an uptrend).

July 2002 is a good example: Even though pessimism was very high in June and early July, prices continued to melt lower until late in the month. The common phrase is "extreme can always become more extreme," and that is most often the case when the readings are in the direction of the larger trend.

My plan is to discuss interesting and (hopefully) useful developments related in some form to market sentiment as conditions warrant. This should allow you to see how I use sentiment as a practical tool for gaining insight into market behavior and how much risk there may be in trading with the immediate trend.

I look forward to our journey together!

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No positions in stocks mentioned.

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