This Sentiment Section has been all about: discovering the background influences which cause a directional bias in the markets. That is, sentiment isn’t so much about day-to-day activities, but about the direction and strength behind trends.
The more research you do on a market the smarter you will become about that market and understanding the background factors effecting your market will expose the overall Path of Least Resistance. The economy, the markets, business within a sector will follow the Path of Least Resistance and this path is based on expectations.
Before going on, I would like to note that the data I covered in this section is, to say the least, overwhelming. And this highlights a major issue – time. How much time can or should be spent analyzing sentiment factors? Investors will put more capital at risk for a longer term and should spend more time analyzing before investing – especially if looking at wealth-building investments for retirement. Daytraders will most likely put much less capital at risk per trade and stay in for very short periods. A daytrader’s experience at the charts will prove a better investment of time and leave less time for analysis of the big picture. I’m talking about individuals here.
Now, back to sentiment.
I have discovered several very useful tools for discovering the so-called expectations and finding the Path of Least Resistance. At the top of the list for investors is Intermarket Analysis. Following John Murphy’s guidelines, intermarket analysis can show what risk is (aversion or appetite) and where the money flow is. (You’ll find that the “Money Flow” indicators are all based on price and volume. ) To me, the best methodology is to watch the Bond Yield Curve, The DJIA, the Futures Curve on Oil, and the COT Report on the Dollar Index. For me, this was one of the best learning experiences from doing this section.
This includes two very important, IMHO, studies. Learn about the Futures Curve and the COT Report. They will help with most whatever you’re trading. Basically, learn those Market Indicators as you have time for.
There were, of course, many factors that relate to smaller, more specialized markets. For instance, if trading in a market sensitive to interests rates, keep an eye on the LIBOR. Currency traders should probably watch the Carry Trade. Those investing in emerging markets might want to know what’s happening with the EuroDollar. These are good, but not nearly as important as…
Market Triggers. These economic, earnings and other related news events can change the game for everyone from daytraders to investors basing their trades on fundamental factors. They can move markets around the world in an instant.
Finally, I have learned that Liquidity and Volatitlty are inverse factors. We are going through some very volatile markets these days. This means that many of the players are sitting on the sidelines and liquidity is down. And when liquidity is down the manipulators are in charge. It’s a time of tests and traps. So, investors beware and traders stay in step with SM.