Stock Market Sentiment Tips

Seasoned investors understand the relationship between price and volume: When price rises then volume tends to increase with it. Likewise, when price falls then volume tends to fall. Closely related is the general tendency for rising prices to continue rising and declining prices to continue downward - to a point. Increased volume is also generally followed by increased price.

Combined, it doesn't take a rocket scientist to understand that increased prices combined with increased volume is the one of the strongest indicators of a bullish market available. You probably have already guessed that declining prices combined with decreasing volume would then naturally represent the most bearish market indicators possible.

Prepare to Climax.

A Buying climax is a slowing of price appreciation combined with rapidly increased volume. It typifies the market top just before a major bear market. Tough to recognize, it is a major advantage if you call it correctly.

A Selling climax is an increase in the rate of price decline combined with rapid escalation in volume. It typifies the end of major bear markets.

Book: S&P 500 Trading Mastery: A Systematic Trading Plan for Capturing Stock Index Profits

Throw away everything you think you know and understand about the stock market: Emerging markets and globalization require their own set of rules and metrics.

1. Analyze the volatility of returns rather than average rate of return.
2. Time sequencing of emerging markets provides greater insight than average rate of returns.
3. Understand distribution foundations.
4. Expect sequential growth and evolution based upon the time sequence of growth and maturity level of the emerging market.
5. Keep an eye on the national credit rating of the country. Yes, nations have credit scores too! Sovereign credit ratings can be located by visiting the IMF or International Monetary Fund.

The Implied Volatility (IV) or vols of a given security is an estimation - rather than actual measure - of volatility based upon the price of the security. IV will be impacted by each of the following to different degrees:

1. Bearish or bullish market. The more bearish the greater the implied volatility.
2. Market price. Price must be in keeping with expectation.
3. Interest rate.
4. Expiration date.
5. Strike price.

All of these factors combined with a given pricing model is used as the basis for formulating various theoretical values. Some of the more common models include Black-Scholes, Newtons or Brent's Method but it should be noted, each is really a better measure of the relative value compared to the market segment as a whole rather than price of the individual security.

A worthwhile instrument for those who track Implied Volatility is the CBOE (Chicago Board Options Exchange) Volatility Index or VIX. Also known as the "Fear Index" it is a commonly used measure of the expectation of volatility in the market for the next 30 days.

	Books: Buying and Selling Volatility
	Books: Option Volatility & Pricing: Advanced Trading Strategies and Techniques

Every investor would like to believe their buy and sell decisions are objective, factual and based upon sound reasoning. Nothing could be further from the truth in the majority of cases. The fact is, sentiment plays such a large role in the financial world there is actually an Investors Intelligence Sentiment Index.

Published by Chartcraft, the Investors Intelligence report is one of the most well known and continuous reports in existence. The purported rationale is to glean insight into market sentiment through an overview of adviser sentiment, newsletters, academic research and others reputed to be "in the know".

Which brings us to the ultimate question: How well does it work? First, it's important to note that it is not an isolated tool nor does it attempt to be all things to all people. It is just one more small tool in the arsenal of investor knowledge and guidance. As such, it does what it is supposed to do fairly well.

On the other hand, it's interesting to note the typical "disconnect" between academic research, advisor's, newsletter guru's and others who seem to perpetually disagree on almost any market condition at any given time; effectively neutralizing one another on the sentiment index.

When they all begin to agree, a relatively rare event, then the index actually works by adopting a contrarian perspective. Extreme bullishness would indicate a coming downturn. Extreme bearishness signals an approaching reversal.

"Irrational Exuberance". Those two words might be the longest surviving legacy of Greenspan despite the current housing slump. In one short sentence of "Geek-Speak", former Chairman of the Federal Reserve summed up the results obtained by combining a bit of pop culture with low ignorance and enthusiasm.

See if you can identify the current Irrational Exuberance & Pop Culture Investing Trends:

1. 2007 is a sucker's rally or the beginning of S&P 50,000?
2. Optimism is rampant. Long term P/E's are still running above average. Why?
3. Failure is Optional. Just don't admit it.
4. Savings below zero combined with negative amortization, minimal to zero equity and the greatest debt burden of any civilized nation in history. Any questions?
5. Baby Boomers. Immigration. Debt. Deficit. $70 trillion and counting. Can you spell INFLATION?
6. China. India. Three billion new capitalists. Hmmmmm.
7. Religion, Politics and Oil do Not spell Relief.

Don't play pop culture BINGO with your investments. Instead, protect yourself and your family by making informed decisions about your financial future.

Books: Irrational Exuberance

Understanding where money has been is the first step in understanding where money is going particularly when it comes to mutual funds.

The Law of Diminishing Returns dictates the rate of growth slows the longer it continues. Savvy investors understand this tendency and use it to precipitate a reversal or even change of investment vehicle. This is particularly useful to provide insight into the future moves of institutional investors who are often under severe pressure to maintain a reliable rate of growth for vast sums.

One of the quick measures to keep a continuous eye on is mutual fund inflows. By measuring the absolute and relative rate of inflows it can provide an early indication of sentiment for both individual funds and the market as a whole.

Price, volume and open interest are the three measures every investor should be well acquainted with. Most people inherently understand the importance of price and volume but open interest is usually the forgotten leg of the proverbial three-legged stool. Without it, you are likely to take a fall.

The number of outstanding contracts by the end of the day is called "open interest"; it's a method of tracking the flow of money to the future market since each seller corresponds to a buyer at a given point in the future. The investor doesn't actually need to know when the finalization of the buy/sell cycle concludes; it's enough to measure the pending number of outstanding contracts to spot prevailing trends.

New Money Flowing to Market = Rising Open Interest = Continuation of current trend

Money Leaving Market = Falling Open Interest = Discontinuation of current trend

Sustained Price = Leveling Open Interest = May Indicate Early Warning for Ending of Bull

Measuring the level of Put vs. Call Interest can tell you a lot about current market sentiment. In the most simplistic terms, a buyer is betting that a given stock or index will decline when they place a put. Likewise, a Call indicates confidence that the stock or index will increase.

Most of the time, there is a buyer for every seller but occasionally, one or the other will predominate. By tracking the Put vs. Call interest level, it is possible to gauge an overly optimistic or pessimistic market tendency.

Contrarian Interpretation. The Put vs. Call ratio is considered a contrarian indicator. Remember, the more people participating in any given movement will require a corresponding opposite effect. It takes courage to go against the market (by definition the very essence of contrarian investing) but to put it to the test, try it out in your virtual portfolio. The next time the put-call ratio indicates a market drop then take the opposite approach.

Stock volatility information can be used in many different ways but here is a quick and easy bit of stock volatility information that you can begin using today:

One to Two year volatility measures. Begin by examining the Highest High's (HH) as compared to the Lowest Lows (LL) then use the following formula:

100* (HH-LL)/(HH+LL)

Compare to the midpoint to derive a midpoint range for volatility.

If you are searching for...

Stable stocks = < 10%.

Midcap = 20% to 35%

Speculative = 50%+

Pop culture dictates everyone can and should invest. While the concept behind the sentiment is correct, the actual methodology used by the masses leaves something to be desired. Are you a part of the pop culture investing? Take this quick quiz to find out.

If you picked a T... you need to do some homework.

Interested in future stock volatility information? Take a look at these top trends that are most likely to impact your financial investment decisions in the coming years.

1. Social Service Process Engineering. The aging population, need for healthcare and medical resources plus shortages in sectors ranging from safety to teaching will require more precise measurement of productivity for the service sector.
2. The Global Marketplace. Not only will emerging economies continue to compete for building materials and fuel but the shift of information and resources throughout the world will increase at exponential rates as discretionary income grows. Simultaneously, mature markets are reaching levels of saturation with declining levels of savings and decreasing discretionary spending.
3. Telecommuting. The brain drain will continue as inexpensive labor with advanced degrees compete for medical, laboratory and other traditional technical careers. Local economies will shift as the need to live and work in the same location become incidental. Concentration of local economic conditions will be based upon shared interest, education and lifestyle leaving pockets of declining population and decreasing services, tax base and other provisions.
4. Global Green. As the ability for those with money to relocate or travel globally increases so will the desire to live and work in pristine conditions. Nations will impose pollution taxation and other measures while individual corporations compete by increasing the barriers to entry via the environmental impact.
5. Science of Management and Investing. It's not there yet but technology is gaining rapidly in the predictive quality of information.

OTC:BB, Penny Stock. Depending upon your personal constitution, at some time or another you have probably been inclined to throw a little mad money in the direction of some of the more volatile - and potentially lucrative - stocks. They can indeed be enticing if for no other reason than the ability to invest paltry sums with potentially stratospheric returns.

So, what about the viability of the wager? Is there anything wrong with having a little mad money stash just to have fun with? Not necessarily. In fact, if handled correctly it might actually be possible to have a little fun and maybe make money along the way.

1. Volume Matters. Nothing is worse than buying a stock that you can't sell. Take a look at the daily (or in some instances - weekly) volume to make sure there is someone on the other end of the transaction. Novice investors are often surprised how limited volume can be and are taken aback when their sell order isn't immediately executed.
2. Sales and Earnings. Yes, it sounds old fashioned especially in light of the pop culture investing mentality but fundamentals still hold true.
3. Percentages Mislead. Especially when dealing with micro or penny stock. It just makes sense. If a stock is trading at a $1 and doubles to $2 then the percentage alone skews the total picture. Remember the Law of Diminishing Returns.
4. Use Caution. Setting aside a little mad money for those fun investment crushes is a great idea - just don't go overboard. Depending upon the total size of your portfolio there isn't anything wrong with using 2% to 10% of your investment dollars to roll the dice and try out your luck.

Books: Jim Cramer's Mad Money: Watch TV, Get Rich

Sometimes you can't win for loosing. You pour through the charts, read all the right research, have the Midas Touch when it comes to selection and you just Know it's a winning proposition this time. So, ante up, leverage to the hilt and go for the gusto...then hope against hope volatility is in your favor.

This is volatility with a twist: Ethical Volatility. Say What? Yes, it's true. Corporate Social Responsibility or CSR is the newest buzzword in the world of finance and Ethical Volatility is the measure against which more and more are moving.

Coffee beans heading up? Better check into the labor practices and pesticide use before placing the final wager on a specific stock. Interested in mining stocks? What sustainable practices are they implementing to off-set environmental damage? It is the new era of investing where CSR is taking an ever increasing level of importance for both individual and institutional investors.

Individual investors are putting their money where their mouth - and hearts - have been for a long time so it comes as little surprise to see a growing trend when it comes to going green. On the other hand, corporations have been slow to adopt many sustainable or environmental efforts so why the recent change? Globalization. The pressure from European and other areas of the world to tighten up the sloppy practices has gathered momentum but even more importantly, those industrialized nations able to meet the more stringent regulatory and socially responsible criteria are now positioned to reap the financial rewards as well. Just take a look at the recent backlash against Chinese manufactured goods containing lead and other unhealthy issues.

Begin implementing CSR volatility measures as a routine practice in your investment decision-making process as an added layer of protection.