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posted on 15 November 2019

Technical Thoughts: Sentiment

Written by , A Dash of Insight

Joining me on Technical Thoughts is my colleague Todd E. Hurlbut, CMT, Chief Investment Officer at Incline Investment Advisors, LLC. Todd is the creator of the Emerald Bay model featured in this column. He is known as “Trending Todd." And yes, that is a hint about his trading style.


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With the US indices at a new all-time high, you might expect investor sentiment to confirm the reality. Instead, bullish money managers are in the minority according to Barron’s recent 2019 Big Money Poll at 27% (down 56% from one year ago) while bullish individual investors are at 33% in the most recent AAII Sentiment Survey.

Technical Thoughts is all about trading. Each week, we do the following:

  • Discuss an important issue for traders,

  • Highlight several technical trading methods, including current ideas,

  • Feature advise from top traders and writers, and

  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: A Market at New Highs

Our previous Technical Thoughts asked how to deal with a market reaching new highs. Our readers had a variety of opinions and reasons. We always hope to spark some discussion, so please join in.

This Week:

Last week, we wrote about avoiding the headlines and instead focusing on how individual stocks and the overall market react to news. In a similar vein, it pays to ignore investor sentiment or even consider it a contrary indicator to investing success. We are conditioned in society to want to buy “bargains" or things on sale. At the same time, perhaps the most bullish thing a market can do is make a new all time high in price. At a new all time high, holders of stock are at a profit and there is less urgency to sell. While intuitively it makes sense that a market at an all time high is bullish, our behavioral biases can make it uncomfortable to invest when the market is “expensive." When sentiment is bearish, typically investors are holding cash on the sidelines which can act as fuel when the fear of missing out overwhelms the original fear that kept them on the sidelines.

The topic is a controversial one for expert traders. A google search on sentiment trading yields 63 million hits. Quantinsti has a nice summary of sentiment indicators. Some of these are based upon surveys, but others draw upon trading data. One measure described in the article is the put/call ratio. Here is a current example from MarketWatch.

Our own experience tells us that markets at an all-time high are inherently bullish. This is reflected in our current holdings and the choices discussed below.

What do you think? We welcome comments and discussion from other traders.

Expert Picks from The Models

Holmes: I bought shares of Wayfair Inc. (W) on October 31st.

TT: How do you feel about the trade?

Holmes: I purchased for technical reasons. Specifically, I am a dip buyer, and I like to buy attractive pullbacks, as you can see in the chart above.

TT: I see the pullback you’re talking about, and it looks attractive so long as you believe the long-term fundamentals are sound and the stock can bounce from here.

Holmes: As a technical trader, with a holding period typically around 6 weeks, I don’t care too much about long-term fundamentals. I’ll be out of this trade long before the long term.

TT: I principally care about an attractive price chart and a stock trading near recent highs. Anyway, thanks for sharing this trade, Holmes.

Road Runner: Interesting discussion guys. I recently purchased shares of The Home Depot Inc (HD) on 10/28. Any comments or questions?

TT: Why’d you buy it?

RR: I like to buy attractive momentum stocks in the lower end of a rising channel, as you can see in the following chart.

TT: It seems like a consolidation within a rising channel and trading at a multiyear high price. Attractive stock indeed.


RR: That’s correct. There are a few more data points that go into each trade, but essentially, yes - you got it.

TT: Okay, I think this trade has potential. Thanks for sharing. And how about you, Athena - any trades to share this week?

Athena: I sold shares of Cable One Inc (CABO) on November 1st after purchasing them on 10/2.

TT: Nice chart, nice trade, why did you sell?

Athena: I look for stocks having strong positive trends and then select only those with the very strongest trends (“king of the hill"), constantly replacing the ones with weaker trends. It should not surprise anyone that I bought Cable One. A quick look at the chart should make the strength of the trend obvious. And I generally continue to hold my positions until either the strength of the trend abates or a stock with an even higher trend strength comes along. I don’t have a set “holding period" for a position. I will exit only when either a stronger stock comes along or if market conditions dictate a strong potential for loss - capital preservation remains the key driver in all situations.

Jeff: CABO was a pretty speculative play. Free Cash Flow is probably a better metric than earnings for cable stocks, but even that approach shows a stock that is ahead of itself.

TT: Thanks for sharing, Athena. And how about you, Emerald Bay?

Emerald Bay: I bought shares of IHS Markit Ltd (INFO) on October 30th.

TT: That’s an attractive trendline. It looks like these shares have been rising steadily in a tight channel for months before you purchased.

EB: I seek exposure to the highest momentum names in our large cap equity universe, adjusted for volatility. Specifically, I like to base my position sizes on volatility with more capital invested in the less-volatile stocks.

TT: You’ve been doing quite well with this position and I suspect you’ll hold it until the trend changes. Thank you for sharing.

Jeff: Not so fast! Let’s take a look at the fundamentals with the basic chart from FASTgraphs. You might need to be prepared for a quick exit.


Investor Sentiment polls have been tracked for years and remain a viable variable to gauge the stock market, yet not in the way you might think. Extreme bull readings often come in advance of market tops while extreme bear readings are seen concurrent with market bottoms. In the face of a market at an all-time high, investor sentiment that is less than bullish should be seen as fuel on the sidelines waiting to drive prices higher.


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