From the October 01, 2012 issue of Futures Magazine • Subscribe!

Sentiment: Putting trading into context

Bull markets climb a wall of worry, but bears slide a slippery slope of hope. Every trader has heard these and other trading adages, but is there any truth behind them and, more important, how do we put them into practice to make money?

Typically, these sayings are rooted in market sentiment and mass trader psychology. No, the market doesn’t ring a bell at the top, but there are clues. You can see them if you are open to the message being delivered. The problem is that message is nuanced and it changes with market cycles. You have to be aware of that cycle and have a finger on the pulse of the market’s sentiment, and then the technical framework becomes much clearer. 

Most traders are familiar with using news headlines as contrary indicators. Jeff Bezos of Amazon was named Time magazine’s “Man of the Year” on Dec. 27, 1999, during a raging tech mania. The bubble burst a little more than two months later. History offers us a few famous examples such as this one, but that doesn’t help a trader who must look for these opportunities on a regular basis week-in and week-out.

To find these clues, you must have a keen eye and respect the message from all angles. To demonstrate, we’ll walk through recent history, starting with the housing bubble. 

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