Saturday, July 14, 2007

Another Look at Stock Market Sentiment

I used to subscribe to a service that would mail me educational DVDs on trading and technical analysis, and, once I was finished watching them, I would mail them back, all for a monthly fee. Most of the DVDs I watched were not very good, but one DVD, by someone named Jake Bernstein, really caught my attention. Since then, I have watched about 6 DVDs from him.

In the DVD I first watched, Jake Bernstein talked about stock market sentiment. He explained that his company would phone several hundred brokers and traders, and survey them on their thoughts on the markets. What Mr. Bernstein found is that when the respondents were unusually bullish, the market was due for a correction, and when they were unusually bearish, a bottom was likely in place.

While most people don't have the time to survey people, this example illustrates one important fact, which is that the public is usually wrong. There are some creative ways to exploit this fact, and today, I will share one of them.

What I have done is look at the statistics of a popular Gold website called Kitco. Through a website named Alexa.com, you can find out how popular a website is, and graph this data. I have made a graph of how many people visited Kitco.com over the last year.

Using my graphic design skills (MS Paint), I have placed a graph of GDX, the Gold Stocks ETF, beneath it. The result is shown below.



This may be a bit of a stretch, but I have shown that spikes in web traffic at Kitco have resulted in tops in GDX chart. This worked really well during 2006, but not so well in 2007, and this is because Gold Stocks have been trading sideways for so long, that the public may not be interested anymore. Incidentally, this fact, that the public has lost interest, is actually a bullish development for Gold. This chart hopefully proves that when the public is interested, you shouldn't be.

Think about the Dot Com boom. Was everybody interested in Tech stocks in the early 1990's? No, nobody was. Was this a good time to buy? Yes, yes it was. Was the public interested in Tech stocks in the late 1990's? Yes, and I was too, but it was the worst time to get into that sector.

I will have more about gauging sentiment in further posts, I hope.

2 comments:

DC said...

After reading the first blog, the one where I first found you, I decided to check this one out. Really quite nice! I loved what you did by setting side by side graphs gauging sentiment and prices; now you've got me thinking...

Danny Merkel said...

Hi DC,

Thanks again for the kind words. I think there is a lot of potential in finding ways to read market sentiment, and it may be one of the most unexplored areas of technical analysis.