August the market. going. doubted the this contrary. term trends. Chart #1

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Vivien Patrick
5 years ago
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In anyy event, I like it because it raises the important point of the power of market sentiment and emotion in setting prices.

1 INVESTMENT THOUGHTS August 2013 Sentimental Journey The market can stay irrational longer than you can stay solvent. This remark has been attributed to John Maynard Keynes, though it may be apocryphal. In anyy event, I like it because it raises the important point of the power of market sentiment and emotion in setting prices. For this quote in particular, an investor may have made what is believed a sound investment call on the market going down, but for whatever reason the market is going ever higher. The market is being irrational he might say. Perhaps waiting for the market to come to its senses will work? For how long can one bet against the direction of the market? It can be said that theree is a category of investors who has held large cash/bond positions and have doubted the U.S. economy, its central bank and the rising stock markett in For how long should this contrary bet be held? The cost in opportunity has beenn high. To be sure, the market will have a set back at some point as it always does, as can be seen in Chart #1 from Credit Suisse. Both short term trends and the long term trends made up from them are determined in part by sentimen and crowd psychology. As investors, we want to avoid extremes of optimism (bullish) and pessimism (bearish). Paying attention to market sentiment can help. Chart #1 1

2 In our weekly portfolio management discussions we try to take the temperature of market sentiment in both a short and long term context. One method is to view a picture (chart #2) of price momentum through examining the percentage of stocks trading above their 50 and 200 day average prices. The S&P 500 is shown in the top of the panels, with moving average levels in the bottom. Is buying or selling pressure rising or falling and is it consistent with the overall direction of the market? We look for divergences if no new highs are reached, though the market is moving higher. Participation rates near 90% for stocks that are higher than their 50/200 moving averages has spelled a topping area and readings near 30% a bottoming zone. From these short term charts one might conclude a correction is imminent. Chart #2 Another view is to look at a survey of those investors who say they are bullish compared to those claiming to be bearish. We can have another data point on market sentiment. Often a margin of 30% or greater either bullish or bearish signals prices may be reaching a turning point. Chart #3 indicates a 30% bullish reading and links it to the price action of the market in the top panel. Previous episodes above 30% have yielded short term tops. 2

3 Chart #3 There are literally dozens of sentiment metrics that parse every move and wiggle. It would be too tedious to venture further; however, investors can help themselves if they will respect trends and the measure of persistence of them. This is not to say be a trend follower without a fundamental view; the price of Apple stock hitting $700/share in September 2012 makes a good case study in how sentiment can change quickly. In the figure below we see the price chart of Apple stock annotated with a Wall St. analyst s buy recommendations. Clearly, market sentiment became so bullish that Apple became a religion stock. The current price target is $530. I don t want to be mean spirited to the Apple analyst; he was not alone. The very same 50 and 200 day moving averages gave a sell signal at $600 when the 50 day fell through the 200 day. 3

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With our fascination in market behavior and sentiment we have to admit that a black box cannot be constructed with all the inputs to sort out the market s future. There are those who have tried.

5 With our fascination in market behavior and sentiment we have to admit that a black box cannot be constructed with all the inputs to sort out the market s future. There are those who have tried. Sentiment is only one modality of the market. There is no getting around fundamental research, asset class and asset allocation judgments. These items must alsoo be fitted with a strategic view and understanding of world markets and geopolitics. At Ledyard Financial Advisors, this is our daily task. Come on in, the water s fine (or is it?). Better check sentiment first. J.T. Underwood Chief Investment Strategist 2 Maple Street, Hanover, NH (603) County Road, New London, NH (603)

Gold, Mining Stocks on the Verge of a Major Bull Market

Gold, Mining Stocks on the Verge of a Major Bull Market By Robert McHugh, Ph.D. In looking at the charts for Gold, Silver and Mining Stocks, it is clear that patterns and wave mappings suggest a bottom