Dow Today – Technical Charts And More – What The ‘Sentiment Indicators’ Show
So, here is the thing. Everyone thinks that the markets are all about fundamentals. They are and then they are not. There is also the technical side of it because the fundamentals can only explain or account for the long-term. There is a third element as well – which is sentiment. Very few look at this one as something of importance. But it is actually of immense importance because it decides how much the fundamentals or technical will reward you.
On a ‘good’ day, sentiments boost your profits while on a ‘bad’ day, they can exacerbate your losses. Most know it but many don’t know how to factor it in. In the last week or two, there were no fundamental inputs that prompted such a gain in a short time. So it was to be labelled ‘technical’, ‘oversold bounce’, or some such euphemism that people use when they haven’t a clue why.
Since bull and bear phases of the markets are essentially an expression of sentiment through the movement of stock prices, it is important to map sentiments. People tend to dismiss it as emotion, irrationality, fear, etc. All those who play on ‘gut instincts’ are actually playing on sentiments, because the gut feel is pure emotion and nothing else. But if you ask them, they will deny that they ever play the market on emotions. There exists a lot of hypocrisy in the markets.
Technical factors seek to capture the emotional element through the measurement of momentum and volatility. Unfortunately, fundamentals have no way of capturing sentiment, except perhaps to quote a homily from Warren Buffet or Peter Lynch. You know, stuff like, “when there is blood on the street…”, etc. The point is, how do you even know if there is blood on the street? It is a nice-sounding rhetoric.
So, in that sense, adding technicals to one’s arsenal of tools makes the analysis somewhat more complete. If we have to judge sentiments then we have to find a vehicle or a tool that represents sentiment swings in some way.
One clear indicator of pure sentiment could be crypto-assets. There being no ‘real’ fundamentals to these tradable assets, I would think that the entire movement is happening from pure supply and demand driven by sentiments. People are trying to clothe what they do by introducing fundamentals but all they are doing in my opinion is trying to justify the technical picture with some understandable—or more likely, acceptable—jargon.