I read The 10th Man each week from Jared Dillian at Mauldin Economics. I love it. He’s a smart dude. I know that from his missives but also because one of my friend’s older brother worked with him at the Pacific Exchange decades ago and he told me that Jared is smart. It’s true. Not many ‘get’ sentiment as it pertains to speculative markets but Jared does. This is from a recent 10th Man:
Sentiment analysis is the study of feelings—knowing that human beings are hopeless at trading from an evolutionary perspective. We are excited by higher prices and demoralized by lower prices.
The bull case is always most compelling at the highs, and the bear case is always most compelling at the lows.
I look at charts most of the day but sentiment analysis is far more valuable. Keep your head on a swivel. Scan headlines, Twitter, etc. For example, Stephen Roach published this USD crash opinion on June 8th…on USD lows. It’s not that the analysis is wrong (no one knows anyway) but this article was EVERYWHERE. Trader friends were sending it and it filled the first page when Googling ‘US Dollar’ (once it wasn’t on the front page, the USD dropped again). In other words, it was compelling. The USD is lower now but there was a short term trade on the Roach piece. Fast forward and sentiment towards the USD is extreme again (there’s a trade there too). Here are a few observations.
from the 7/21 SB Swing Update
This is a picture of the TV in my living room earlier today. I keep Bloomberg on throughout the day for background noise (until I’m sick of it) and the scrolling headlines on the right of the screen are the same headlines that are published on the app. The headline circled in red would not appear if the short USD trade weren’t extremely crowded, at least on a short term basis. Sentiment is ripe for a reversal.
from the 7/22 SB Swing Update
THE U.S. DOLLAR IS GETTING PUNCHED IN THE MOUTH, AND ITS OUTLOOK AMID CORONAVIRUS DOESN’T LOOK GREAT, SOME EXPERTS SAY
This article from Marketwatch was published late on Tuesday. The text and imagery is textbook sentiment extreme (literally textbook, there are chapters devoted to this stuff in my book, Sentiment in the Forex Market). The active language, ‘punched in the mouth’ indicates an extreme. The extrapolation of current trend, ‘outlook doesn’t look great’, indicates an extreme. The blood on George’s mouth and band-aids on his face also indicate an extreme. Bottom line, USD bearish sentiment is extreme and markets reverse from sentiment extremes.