The Prominent Indicator You Can’t Trust

04/26/2012 3:00 am EST


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. If the market’s going up, sentiment is improving, and that’s a good thing.

Michael, a lot of traders watch the S&P 500 even if they’re not trading it because they want to see what that market is doing and how it relates to other markets.

What do you suggest traders watch outside of what they’re actually trading to get a feel for where everything’s going?

I think people should really grasp onto the whole concept of the risk-on assets and the risk-off assets and follow those.

Ultimately, those are the biggest indicators of how traders are actually feeling and how they’re acting. Rather than trying to assess “Are things really bullish, or are things really bearish?” just follow those and keep it simple. It’s really confusing out there, so I stress keeping it simple.

Is there a risk-on asset that you’re looking at that is good for stocks that we should keep an eye on, specifically?

Yeah, I generally follow the ProShares UltraShort 20+ Year Treasury Bond Fund (TBT), which is double-short Treasuries, and when that’s going up, risk is on. When it’s going down, risk is off. TBT: the one to watch.

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