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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » The Sentiment Cycle – An interesting perspective

The Sentiment Cycle – An interesting perspective

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sriranga

sriranga
Co-Admin
“The Market is a mechanism for messing as many people about as it can, as often as possible”.

Sounds a bit cynical, but I believe a firm knowledge of the sentiment cycle and an understanding of where we are within the cycle could help us guard against being messed about and give us a clue as to where we’re heading (like a ‘roadmap’).

The Sentiment Cycle – An interesting perspective Sentim11

Justin Mamis sums up nicely what the Sentiment Cycle represents “What we have is essentially a graphical representation of the manic depressive moods typically experienced by market participants as a function of time and price in one complete sentiment loop.”

See the chart above, taken from Mamis’ “The Nature of Risk” book.

Before we go any further, let’s take a quick glance at the different phases and the market psychology behind them.

Returning Confidence
By the time confidence is fully restored the markets have been rallying for some time. They start to get choppy and retracement moves get consecutively more fierce, each one more intimidating than the last.

Buying the Dip (the big dip)
A huge pullback now gets underway, even larger than the scary one you may have witnessed last month or so. After such a dynamic bull run, investors are willing to take on a phenomenal amount of risk and the smart money buys the big dip. Also, money is still flooding in from the general public, who likely read in The Sun that stock markets will remain strong for all eternity.

Enthusiasm
At this stage all economic data still supports the idea of higher prices. Traders that didn’t get involved in the last dip-buying opportunity now have hard evidence that it worked before. All of the traders that wanted to be long, are long (there are no more buyers), causing prices to decelerate. Distribution starts to take place, i.e. stock transfers hands, from smart money to stupid money…. Strong to weak.

Disbelief
Traders start to get that gut wrenching feeling that something may be changing but the fundamentals still don’t back this up, and people cling onto hope alone. Analysts start to get subtle warnings. Maybe previous market leaders start to break below important support levels or Moving Averages.

Overt Warning/Panic
Typically there’d be a catalyst here (i.e. big banks like Lehman brothers start to file for bankruptcy… sound familiar?). The index will break below a previous reaction low or maybe the 200 day Moving Average. News readers will be telling the world that the fun is now over. Intelligent investors start to sell rallies, giving stock prices little/no chance of any recovery.

Discouragement and Aversion
Prices have been rattling off for some time now, as the general public start shedding stock and the short sellers are stronger than ever. There’s no good economic news flow and everyone thinks that stock markets will go down forever.

Wall of Worry
Certain market sectors will now start to bottom out as everyone that wanted to sell has done so. The smart money now starts to move in slowly, resulting in the market pausing for breath or drifting along sideways for a few months. There are no sellers left, so despite the bad news flow markets start to creep higher. Short sellers start to cover their positions, adding fuel to the fire.

Aversion to Denial
Markets start to trend upwards. Short sellers start to get concerned that sentiment has changed. With no sellers above the market, these sorts of moves can be fast and sharp and tend to leave people behind.

This brings us back to ‘Returning Confidence’.


Edited article from http://www.futurestechs.co.uk

http://sharemarket-srilanka.blogspot.co.uk/

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Thanks for sharing a good one.

godswen

godswen
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Place of 'Denial' phase on this chart is different to other charts,

In this does it mean, denying the fact the market is gona go up after a dip?

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
Denial in this case is disbelif that market can go up.

@godswen wrote:Place of 'Denial' phase on this chart is different to other charts,

In this does it mean, denying the fact the market is gona go up after a dip?

vacna

vacna
Equity Analytic
Equity Analytic
you may call this unethical, but if anyone wants to download the full e-book of Miamis Nature of risks, you may visit this russian site , press the button GET and download the book , its about 46MB in Size. use the link below
http://libgen.info/view.php?id=567453

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
@vacna wrote:you may call this unethical, but if anyone wants to download the full e-book of Miamis Nature of risks, you may visit this russian site , press the button GET and download the book , its about 46MB in Size. use the link below
http://libgen.info/view.php?id=567453

Thanks mate for the link.

Kumar

Kumar
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Seems to be we are in Anxiety stage?

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