How to use Sentiment to your advantage (Plus a Google update)

Steady as she goes for now but I suppose I’m gonna have to trim our Google call options a little more if this stock moves much higher from here. It’s up $80 since we added to Google common and call options. Steady for now though.

Is it time to be contrarian by selling this market? Time to buy puts because the downside risk outweighs the upside potential? Being contrarian means betting against widespread sentiment.

Sentiment means different things in different time frames.

In a shorter-term sense (say, looking out over the next few weeks or so), you can often bet against the popular sentiment measurements from SentimenTrader.com to the AAII Sentiment poll to Scutify’s sentiment apps. But you have to wait for them to all get extreme before you can try to make a trade off those sentiment measures. Most sentiment polls I see right now are bullish, but not extremely so.

In a longer-term sense (say, looking out over 2-3 years), the time to be contrarian is when everybody you know is telling you about their favorite stocks and how much money they’ve made in the stock markets. In my column from yesterday looking back at the Dot Com bubble taking us to Nasdaq 5,000 back in the year 2000, several commenters underscored this signal to go mid-term contrarian:

DJ wrote: “As a pro I had big positions on these stocks but personally I just had a few positions. I coached hockey at the time and went to practice on Sunday. My assistant coach started asking me about stocks as soon as I showed up.”

Will B wrote: “In 2000 we were visiting friends who had as two guests a pair of, so called “day traders”. The two of them were talking about making a fortune by buying and selling on a daily basis.”

So fast forward to today, and I don’t think you’re seeing that kind of global bullishness, despite the markets being at all-time highs and the Nasdaq being back at 5,000.

Indeed, here’s DJ’s reply to my question if he was seeing any assistant-hockey-coach indicators these days: “I haven’t seen anything from my neighbours or relatives that gives any indication that this is over. It may well be but anyone that was around for the first 5,000 Nasdaq will tell you it was much crazier than this.”

On other hand, you can type “stock market bubble” into Google and you’ll find plenty articles, blogs, reports and quotes from people sure that the markets are about to crash. Most of whom, of course, have been saying that for the last 2000 point move in the Nasdaq.

As always, there’s no place for dogma in trading and analysis, so if you’ve been following someone who’s been bearish for the last five years, missing this huge run in the stock markets, then maybe it’s time to quit reading their stuff. Likewise, if you’ve been following someone who’s been outright bullish for many years and completely missed the last couple market crashes (those of 2000-2002 and 2007-2009) then maybe it’s time to move on.

Heck go back to 2010, and here’s my article address the “tech stocks are in a bubble” concerns at the time:

Is Apple in a bubble, as most permabears and gold-bugs tell me every time they get the chance?  Is Google bubblicious too?

Or will I turn out to be correct when I wrote this in my Worst case scenario for apps is still a better bet than anything else you can invest in column earlier this week: “Google will still have grown its cash flow and earnings over the next decade and that means the stock will likely be higher in 2020 than it is in 2010. Same goes for Apple.”

Google’s up 100% since that article and Apple’s up 200%, and I still don’t think they’re anywhere nearly in the outrageous bubble that tech stocks were back in 2000.

Put another way, my colleague Brian Gallo wrote today:

“Sentiment is expression in words, dialogue, social media, conversations with non-market ppl, real ppl expressing real opinions in words. Surveys where you push a button or are solicited for an opinion have been bullish all the way up. This thread has leaned bearish/cautious all the way up. Look at today. Less than 24 hours from all time highs Nasdaq 5k and its back to caution/worry… Thats fine with us. Climb that wall.”

So going back to the original question. When I see the Bullish/Bearish sentiment charts going extreme in their bullishness, I usually look for a near-term pullback in the markets of maybe 3-5% or even 10% or more just to get the weakhanded longs shaken out of the markets. I don’t often try to game such a move by trading on that analysis, and I don’t see enough extreme measurements in those charts to make me want to try to game them right now anyway.

But as far as sentiment being wildly bullish enough to mark the kind of top we had in tech in 2000, in housing in 2006 and in energy in 2014, I don’t think we’re there. At least not yet.

I’ve been saying since 2010 that we are headed into the Biggest Stock Market Bubble of All-time and we’re getting there. Some of my favorite stocks right here right now include: Google (which I’ve noted I was buying recently when it was below $500), Facebook, and Sony. But I’m not adding to anything personally just now.