lecture 11: sentiment Flashcards
Sentiment
the net amount of any group of market players’ optimism or pessimism reflected in any asset or market price at a particular time
when is a price reversal is usually due?
When emotion becomes excessive and prices thereby deviate substantially from the norm
The market is made up of which 3 types of players
The informed
the uninformed
liquidity players
The majority of market players
The informed
The retail investors – the public at large, those who tend to chase the market
They are the ones who tend to buy at peaks and sell at market bottoms
Even professionals can be classified as uniformed. It is the timing of their actions that qualifies them as uniformed players.
The informed market players
tend to act in a way that is contrary to the majority
CROWD BEHAVIOR
People tend to conform to their group, making taking an opposite view difficult, fear of rejection, ridicule, hostility etc.
People feel secure in accepting the opinions of others or “experts”.
As people “follow the herd” they get caught up in extreme buying or selling, pushing prices to extreme levels.
These emotional excesses can result in crashes or bubbles and going against the crowd before the peak or bottom could be dangerous
CONTRARY OPINION
a school of thought in investing which is the opposite of crowd behavior.
It involves doing the opposite of what the majority is currently doing. That is, to sell when the majority is buying and to buy when the majority is selling.
The task of the contrarian player is to find a way in which to quantify which direction the majority of market players is headed and to question whether they are reaching an extreme and whether there is enough energy to keep the market moving in that direction
Sentiment Indicators
data sets that give the technical analyst some feeling for how much prices are at emotionally excessive levels
Emotional excess is often sharpest at market bottoms when panic has occurred.
On the other hand optimism can last for a long while.
–> Therefore, most sentiment indicators are more useful in determining market bottoms when fear has reached an excess
How is sentiment of uninformed players measured?
SENTIMENT INDICATORS BASED ON OPTIONS AND VOLATILITY
POLLS
OTHER
SENTIMENT INDICATORS BASED ON OPTIONS AND VOLATILITY
PUT/CALL RATIO
Total volume of puts traded in a day / Total volume of calls traded in a day
If the put/call ratio is high
what if its low
this would represent more puts being traded with respect to calls, which in turn, means that the market participants are more bearish than bullish
A low put/call ratio would imply the opposite
SENTIMENT INDICATORS BASED ON OPTIONS AND VOLATILITY
VOLATILITY
We look at the VIX which is the implied volatility of the S&P 500 options
how can we use the VIX (or implied volatility)?
implied volatility measures are forward looking and not backward looking, we can use them to gauge where the market will be going in the future
when does High Volatility tend to occur
what about low
at periods of stress, emotion, uncertainty, fear and nervousness most often peaking at a panic bottom
Low Volatility tends to occur during market rises and market peaks when emotions are calm, content and relaxed
Generally, what does it mean when the VIX trades high?
what about low?
there is some sort of a sell off that occurs,
when it trades at a low level, the market tends to increase
