Sentiment Indicators and Contrary Opinion
this is achieved by being privy to unique and exclusive information or by the ap-
plication of some form of analysis that affords the participants such opportune
market timing. For example, if the application sentiment or classical technical
analysis allows a trader to consistently buy at or near market bottoms and sell at
or near market tops, he or she is also said to be a well‐informed market partici-
pant. In this case, the information was derived on analysis.Crowd Irrationality at Market extremes
It is generally accepted that the public usually overestimates the duration and extent
of market uptrends while underestimating the duration and extent of market down-
trends. The well-informed begin their buying campaigns by accumulating positions
at cheap prices at market bottoms, usually after a large decline in prices and when
the sentiment is most bearish. They are careful to accumulate in a gradual manner
so as not to drive prices up too fast, allowing them to continue to accumulate as
much as possible, by buying from the under-informed, at the most advantageous
prices. The under-informed, at that point, are in a state of extreme panic, liquidating
at whatever prices are available in order to expedite their exit from the market. They
are overly pessimistic about the market. As prices start to climb, more savvy inves-
tors begin to buy into the market. It is when the uptrend becomes somewhat more
obvious that the public starts to notice the rising prices. Public participation starts
to increase, driving prices up substantially, which in turn attracts even more public
participation, in a self‐perpetuating positive feedback cycle, causing prices to spiral
upward very rapidly. The under‐informed public gets swept up in a wave of frenzied
buying, not wanting to miss out on participating in the exceedingly bullish trend. As
the ability to buy starts to wane due to the lack of access to any additional funds and
having used up all available margin in brokerage accounts, prices start to decelerate.
As the market tops, the well‐informed participants start distributing at high-
ly advantageous prices, selling to the overly confident under-informed who still
believe that the trend is very much intact or will shortly resume in momentous
fashion. The under-informed are behaving and reacting to prices in an irratio-
nally exuberant manner. Market sentiment is extremely bullish, with the under-
informed being overly optimistic at this point. Prices start to decline after all
buying has been shut off. Many of the under-informed are still holding on to
their positions, believing that the decline is only a small healthy correction after
an extensive run up in prices. Some even less‐informed participants continue to
buy into the market, hoping to get in before the market takes off again. The entire
process repeats in a cycle of booms and busts.even Contrarians Must follow the herd
It should be noted that the well-informed are not contrarians all of the time. Be-
ing stubbornly contrarian during an extensive and prolonged uptrend in prices
will prove exceedingly costly. It is only at or near market tops and bottoms that a
contrarian view is adopted by the well‐informed participants, with the rest of the
time spent profiting by riding the trend that is being fueled and driven up or down
by the larger mass of under‐informed participants.