Sentiment in financial markets Essay Example | Topics and Well Written Essays - 1750 words

Sentiment in financial commercialises - Essay eventBut if you squander no feel for what the expectational environment is, youre kind of flying blind. You might have a good feel for the fundamentals and the technicals, but very often its the expectational backdrop that makes the difference.For example, many investors are foreclose because they own a stocktaking and the stocks loot meet or perhaps even exceed expectations. And lo and behold, the stock goes down and good deal are at a loss to explain why. But for other stocks, the earnings come in and exceed expectations, and the stock skyrockets. Why the differenceThe reason is sentiment. Very often, the sentiment had been too optimistic before the positive earnings report. In the days before the announcement, there whitethorn have been a heavy accumulation of call options. So there is a lot of anticipatory purchasing of the stock, which then pretty much has run its course when the earnings come out.But with these and other m easures, you mustiness wait until they encounter to some kind of extreme level before they carry contrary implications. For example, when everybody who could potentially be bullish is already bullish, then essentially most of the buying power in that occurrence market has been dissipated. At that point, the market becomes very vulnerable to merchandising because there isnt enough buying to scrub the selling.Similarly, if only a very, very smal... Perhaps they have even shorted the market. That means the market has become to a greater extent primed to move upward because if buyers should come in they leave not encounter much selling pressure because the selling has already occurred. So imagine a poll today that says 80 share of futures traders are bullish. Remember that people, whether futures traders or individual investors or market-letter writers, tend to be trend followers. Their opinion tends to be a reflection of whats going on in the market. So if 80 percent are bullish that doesnt mean that the market is at its peak. No. 1, you would expect them to be bullish, and, No. 2, they can always get more bullish. I think this points out a trap that the bears have fallen into. Theyve noticed signs of bullishness, viz. the amount of money thats flowing into mutual funds, the investment clubs, the Beardstown Ladies books and so on. You get into trouble when a market is in a powerful technical trend and you analyze it without reference to the fact that you expect people to be bullish in a bull market.When a stock rises on positive earnings, which as well occurs often, there may have been a lot of concern about the earnings report and investors may have bought a lot of put options, or shorted the stock.Without a measure of sentiment that is accurate, you can go down all kinds of blind alleys. Some of those who have been bearish on the stock market will tell you that there are many more investment clubs than there were 15 years ago, or that mutual funds now o utnumber the stocks on the Big Board. These are all good cocktail-party things to bawl out about, but theyre not really measures of sentiment that have parameters associated with them. Theyre just anecdotal.Academic