Establishing market sentiment, fearful or greedy?
In a recent post we discussed SentiTrade’s realtime market sentiment calculations and how this could be used to anticipate intraday market moves, particularly in early trading. Today we’ll show how SentiTrade’s end-of day values may be used for taking positions with a somewhat longer perspective. First, SentiTrade’s end-of day calculation issues at 08.55 just before markets open in Europe. It includes all financial news published the last 24 hours. On monday the ratio number was 0,46, showing a 46% positive vs. 54% negative news stories.
Most people would consider this to be a fairly neutral ratio because it is relatively close to a 50/50 equilibrium. SentiTrade’s analysis of end-of-day market sentiment (starting in 2005), shows that the average ratio is 0,62, i.e. 62% positive vs. 38% negative news articles. Accordingly, a 46/54 ratio is considered quite negative, in fact, the third lowest for the past 6 months after March 14th, following the earthquake in Japan.
Warren Buffet has been quoted saying that successful investing is about being fearful when others are greedy, and being greedy only when others are fearful. This philosophy correctly observes that the “crowd”, consistently follows the collective emotion, ultimately getting in/out of the market too early/late stage.
By using SentiTrade as a contrarian indicator, one may establish when the crowd is fearful and conversely, when there is too much greed. Applying this strategy early this week, when the DAX was around the 7050 level, gave a healthy return of ca. 150 points two days later which met our profit target.
To find out more about using the SentiTrade end-of-day values, send us a message here, or via email to email@example.com.