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Sentiment Reigns Supreme

Perhaps the single most overlooked indicator in short-term futures tradВэing is that of market sentiment. I have written and researched extensiveВэly on this topic. Since I first began trading in 1968 I have been fascinated with mass psychology in the stock and futures markets and with the application of market sentiment measures as objective methods in assessing trader psychology. Possibly it may have been my original occupation of clinical psychologist which attracted me so strongly to the concept of contrary opinion and market sentiment. In any case, it is an interest that has persisted through the years. Indeed, market sentiment and trader psychology have been more than mere passing interestsтАФ their application to short-term trading has served me well.

In studying market sentiment we find with few exceptions that when the vast majority of traders expect a market to move in a given direction, it is most often true that the majority is wrong. I won't go so far as to say that the majority is always wrong. This is not the case. In fact, the majority can be right very frequently for brief periods. However, my studies showed that the more strongly the majority maintains a given opinion, whether bearish or bullish, the more likely the majority is to be wrong.

My desire to quantify market sentiment as a measure of trader psyВэchology led me to search far and wide for concise market sentiment data which would assist me in my short-term trading. For years, however, I was unable to find such information due to the fashion in which market sentiment data were collected and disseminated. R. Earle Hadady of Pasadena, California, deserves credit for popularizing his concepts of bullish consensus, but I found his data useless to me as a day trader, since they reached me much too late. By the time I received the data, they were almost a week old.

Although Earle did a wonderful job polling brokers, newsletter writВэers, and other market professionals on their sentiment, the dissemination of his data was necessarily delayed due to the mechanical process of information gathering. My inability to find prompt and accurate daily market sentiment led me, in 1987, along with several associates, to begin my own program of daily sentiment collection. The daily sentiment index was designed to assess traders on a daily basis regarding their bullish market sentiment on all active futures markets. Since data collection began, I have amassed a considerable historical database of daily market sentiment which I have found to be extremely helpful in short-term and day trading.