The Game of Sentiment

“The truth does not change according to our ability to stomach it.”
- Flannery O'Connor

This too shall pass…

Now there’s a lifetime mantra for long-term investors!

Let go of all those headlines that seem so permanent and important each day. Give them the time they need to erode – through 24/7 repetition – and lose their emotional charge. 

And very soon – often within just 24 hours – the assumption of any meaning will have evaporated from the “attention screen” of your mind, and all those thousands of seemingly horrible moments will have been baked into the steadily improving landscape.

That blending process goes almost unnoticed.

The Sentiment Game

The image below is like a closing bell measure of short-term sentiment based on seven different indicators that CNN runs live all the time.

This one was taken last week:

Ok, so we can see the current read is 59 (on a scale of 1-100).

Often people see that reading, decide in their mind to act or not act, and then forget about it.

That would be an error.

It misses the most important parts of this snapshot.

We learn far more by comparing the current reading to those of the past than knee-jerk reactions to what’s in front of us.

Notice that just one month ago, the reading was much higher at 88. And a year ago it was higher still at 89.  

An arbitrary conclusion would be that fear and greed levels were lower today than they were before, and thus prices would be as well.

But that’s just not the case:

In fact, one month ago the S&P 500 was 1.78% lower than it is now.

And one year ago, the S&P 500 was a whopping 13.34% lower!

You see, lost in all the terrible things which have created an even deeper-seeded level of fear in the minds of most (even worse than the Great Financial Crisis of 2008-2009), is the idea that prices are now lower, and the crowd feels worse.

It is not just a month ago and a year ago. It’s a theme.  

Let me show you how in the data:

So, the image above is actually the same numerical data as in the first snapshot above.

But instead, all those daily reads are now placed into a rolling indicator.

We like to call these things the emotional heartbeat of the markets, because, after all, in the short-run, markets are almost entirely emotional.

Back to my point.  

We can see that we roll back and forth over the 59 reading many times. 

I’ve just picked out four spots in the chart and placed what was, at each stage, the present value of the S&P 500. 

Now, going further back on each entry and corresponding with the blue numbers on the data above we can see:

1:  The S&P was 17.2% lower than today. 

2:  The S&P was 24.1% lower than today. 

3:  The S&P was 29.6% lower than today. 

4:  The S&P was 27.1% lower than today (Recall 2018 spent a lot of time in a trade range).

The Point? 

None of the periods noted were in extreme reading levels. Had they been, the numbers would be even farther apart. 

The theme here is more important: Even though there were many, many things we could have got distracted by and lost in as the emotional news stories rolled through, improvement was always on the horizon. 

As we stand on the edge of decades of disruption ahead (and significant opportunity for the patient investor willing to remain steady), it is imperative that we all understand these overriding truths: 

• Volatility is not your enemy. 
• Volatility is not risk. 
• Volatility is a required part of the market puzzle. 
• Time is your definer of risk. 
• Time is your friend. 
• Time carries you beyond the emotional charge of the moment.

There are more storms coming, folks.

Don’t get lost in the sentiment game.