Sentiment

Sentiment is another factor that is widely used by technicians in their analysis. Concensus can be right for a long time, but is usually wrong at extremes. There are a number of tools that can be used to gauge sentiment for a specific security. It is important to remember that sentiment is secondary to price action and should not be used as the sole reason for an entry / exit into a position. Large unwinds in sentiment can lead to aggressive moves in the opposite direction of the initial trend.

Polls:

There are a variety of polls that are put out by different institutions that look to gague sentiment of different types of market participants. The idea is to watch these polls for extreme bullish or bearish readings, relative to historical norms that is. What happens in the middle of those polls is mostly noise, but the extreme readings can by very helpful in a technician’s analysis.

Commitment of Traders Report:

The commitment of traders report shows the net positions of futures and options for commercial hedgers, large speculators (institutions), and small speculators. This data is important because commercial hedgers are said to be the “smart money” because they are the ones whose businesses deal with the goods in which they are trading. They are essentially the insiders of the futures markets, whereas companies are the insiders of the stock market. There are also indicators that can be constructed using these data points including the C.O.T. Move Index and the C.O.T. Index.  I won’t get into this much further, but this is just another report to be aware of and made use of in your analysis. Check out timingcharts.com for on this subject.

Options Market:

The options market is a valuable tool in identifying the biases of institutions. By analyzing where the largest open interest is as well as scanning for large block trades and heavy volume, we can identify where the “smart money”, or institutional traders, are expecting the stock to go. The caveat here is that we although we may be able to see what position they are putting on in the options market, we do not know who the players are, nor do we know what role that position is playing in their overall portfolio.

Short Interest / Days to Cover:

The largest moves occur at extremes, which is why it is important to pay attention to short interest. This data can be found at Nasdaq.com and is reported twice monthly. How significant an amount of short interest is really is all relative to what it was for that particular security in the past. There are two numbers that are important.

  1. Shorts as a % of float: The float is the amount of shares available to be traded in the public (secondary) markets. If a security has a large percentage of its available shares (float) sold short, it can signal that concensus is overly pessimistic and that under the right conditions, a short squeeze may insue.
  2. Days to cover: Days to cover is used to determine how many days on average daily volume would it take for all the shares that are sold short to be covered. I usually use the 10 day average, but it really is a matter of preference.

Sell Side Analyst Coverage:

Another important indicator of how optimistic or pessimistic concensus is about a security is to look at how many sell side analysts that cover the stock have it as a buy rating. If a large percentage of the analysts are rating a stock a sell or hold, that presents what may be an overly bearish concensus view. The same applies if a large percentage of the analysts are rating a stock a buy, that presents what may be an overly bullish concensus view. Looking at this type of information may assist you in identifying extremes that may present good risk/reward scenarios if price confirms this secondary data.

Stocktwits / Twitter: 

Both stocktwits and twitter provide valuable information on how individuals are currently viewing the market or a particular security. Although it can be hard to quantify what the views actually mean, it may be helpful to use this info as anecdotal evidence to support your thesis. If you think that there’s no value in this, just try to post something bullish about a stock that nobody likes and see the hate and flack you get. Everyone hated treasuries to start the year, and now they’re on of the best performing asset classes of  2014.

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