How to track sentiment

This is the first post out of three on how I determine my position in the market, the other two will be liquidity and leading indicators.

With regards to sentiment I believe it is a key feature to keep an eye on. It swings everyday and I use it in a contrarian way aka “when everyone is bullish, I’m bearish”, in such way I can spot weaknesses in the market and try to have an edge against the other players. But which indicators do I follow for sentiment? Let’s see them.

  1. AAII Bull/Bear Ratio. I track the individual investor sentiment survey using the ratio between Bulls and Bears, then I use the 3 months moving average to identify the trend. As last point, I use percentiles to spot overbought and oversold conditions.

2. Put/Call Ratio 20 days moving average, it is a must in a sentiment checklist as puts are used as protections by many investors. Therefore, when you see too many puts compared with calls, well boys it’s time to jump on the boat, the opposite if we see many calls.

3. S&P Price as % of 200 day moving average, it’s pretty similar to the put/call ratio but I tend to use it mainly to find buying opportunities as the price most of the time reacts irrationally to news or new information released in the market.

4. Fear and Greed index by the CNN Business. I track it on a weekly basis and I can get a proxy of what the sentiment is in the market and buy eventually some protections.

5. Futures positions on the S&P500 E-Mini, even in this case I can take a look at investors positions and have a clue on what kind of directions they are betting on.

6. % of stocks in S&P500 with price above the 50 day MA, smoothed by 10d moving average. Just look at the chart, it’s a perfect timing machine to buy and sell stocks.

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