The Prominent Indicator You Can’t Trust

Focus: TRADING

Michael Comeau Image Michael Comeau Editor, "Buzz & Banter", Minyanville

Traditional sentiment indicators can be taken with a grain of salt, says Minyanville’s Michael Comeau, who believes old-fashioned price action tells the real truth.

Traders are always looking for an edge, and one of those edges is the sentiment of the markets, but should you be a contrarian or agree with that sentiment?

Our guest today is Michael Comeau, and Michael, how do traders use sentiment, or how should they use sentiment in their trading?

We always hear about how you want to buy when there’s blood on the streets, and right now, everybody seems horribly confused. All the market participants seem like they’re chickens with their heads cut off.

Now you see the sentiment indicators, things like the AAII (American Association of Individual Investors) bulls are sky high, and at the same time, everybody’s calling a top, and I feel those two forces are colliding.

Recently, Nouriel Roubini and a few other very prominent people came out publicly very bullish, and everybody jumped on them. They say, “Oh, those guys are morons. They don’t know what they’re talking about.” Like the market’s going to crash because they came out bullish.

I think sentiment is incredibly difficult to assess on typical indicators like the AAII bulls and put/call ratios, the Volatility Index (VIX), and things like that.

People should be looking strictly at price action to determine sentiment, and the whole risk-on, risk-off thing, which is really big. For example, when utilities go up and Treasuries go up, it’s risk off, and risk is on when tech goes up, junk bonds go up, and things like that.

So I think people should really focus on those rather than all these esoteric indicators.

Just keep it simple.