Itech lecture 11 Flashcards
How is sentiment defined
The net amount of any group of market player’s optimism or pessimism
When may the market be accompanied with sentiment
If price is considerably above or below intrinsic value (fair value)
If emotions (sentiments) become excessive and prices deviate from the norm, what may happen
Price reversal back to the mean
What are the three types of players in the market
1) the uninformed
2) the informed
3) liquidity players
The majority of the market is made up of what kind of players?
Made up of uninformed players
What can be said about when uninformed players buy and sell
They buy at peaks and sell at bottoms
Can professionals be uninformed investors?
Yes
What qualifies someone as an uninformed player?
The timing of their moves
How do informed players usually act compared to the majority of players?
They act in the contrary way (opposite)
What can be said about when informed players buy and sell
They buy at market bottoms and sell at tops
How can someone know the direction of future prices with market sentiment
By determining how each group is acting
Especially in market extremes, who acts correctly and who act incorrectly
The informed act correctly and the uninformed act incorrectly
What does crowd behaviour say about groups
people tend to conform to their group
What happens as people follow the herd
They get caught up in extreme buying and selling, pushing prices to extreme levels
What happens when the market reaches extreme levels
Crashes or bubbles
What is contrary opinion
Investing in the opposite of crowd behaviour
In contrary opinion, when people are buying, what would you do?
Sell
In contrary opinion, when people are selling, what would you do?
Buy
What is the “task” of the contrarian player?
Find a way to quantity which direction the majority of players in the market are headed
What are sentiment indicators
Data sets that give TA an idea of how much prices are at emotionally excessive levels
What can sentiment indicators predict
Potential future reversals in trends
**When are sentiment indicators more useful? (2)
determining market bottoms when fear has reached an excess
-More useful in analyzing markets than individuals securities
When is emotional excess highest (sharpest)
At market bottoms when panic has occurred
How long can optimism last
Can last for a long time
Most sentiment indicators focus on which players?
The uninformed
Investors who buy call options have what view on the market
Bullish view (think the price of security will go up)
Investors who buy put options have what view on the market
Bearish view (think price of security will go down)
What does a put/call ratio represent
High put/call ratio would represent market is more bearish than bullish, the opposite is also true
If put/call ratio is up, the market should be…
Down
If put/call ratio is down, the market should be…
Up
Can volatility be used to measure sentiment?
Yes
What is the VIX
Implied volatility of the S&P 500
Are volatility measures forward or backward looking?
forward looking
When does high volatility tend to occur
At periods of stress, uncertainity, most often peaking at market bottom
When does low volatility tend to occur?
During market rises and market peaks
If the VIX trades high, what does this mean?
There is some sort of sell-off (prices go down) that occurs
If the VIX trades low, what does this mean?
The market tends to increase
When does the VIX tend to rise exponentially
When the market comes under selling pressure,
What are polls in sentiment?
A simple way of gauging market sentiment by asking players if they are bearish or bullish
If the poll points to players being bullish, what does this truly mean?
Contrary indicator because these players express optimism at market tops
What can be used to measure contrary opinion, why?
Mutual funds because they are mostly made up of uninformed players
Why do mutual funds hold cash?
Because high level of cash usually occurs at stock market bottoms
What does margin debt reflect
What the uninformed investors are doing
What does higher level of debt indicate?
Indicator that the uninformed players are more active
What does lower level of debt indicate?
Indicator that the uninformed players are less active
What is the NASDAQ to NYSE volume
Measure of speculation
When the market peaks what happens to the NASDAQ to NYSE ratio
It also peaks
When the market bottoms what happens to the NASDAQ to NYSE ratio
It also bottoms
What can short selling be used for
As a contrary indicator
When percentage of short sales to total trades increases, this is an indicator of what?
Indicates bearish extreme and the market is likely to rise
When short sale goes up, the market goes…
Up
When short sale goes down, the market goes…
down
What does magazine cover theory indicate
Contrary indicator, since they are usually wrong
What should players do in regards to insiders
Follow insiders buys, but don’t necessarily need to follow insider sell
What does the SEC require
Requires insiders to report their transactions within 2 days
what does the sell/buy ratio take into account
number of insider buy and sell transactions for each company
What are large blocks
It is a large amount of stocks that are bought or sold
Who trades large bloks
Professionals or the informed players
If large blocks are sold, what happens to price
Price goes down
If large blocks are bought, what happens to price
Price goes up
What does commitment of traders (COT) report
positions of non-commercials (large speculators)
If large commercial traders are buying and small traders are selling, what should happen to prices?
Prices should rise
If large commercial traders are selling and small traders are buying, what should happen to prices?
Prices should fall
If the COT shows that the funds have an unusually large portion
there is a risk that prices may suddenly reverse, since the market is too high
