Market sentiment analysis still tends to be perceived as somewhat of an exotic to the point of “fuzzy” approach, in light of the fact that… well, nothing is set in stone. As a bit of a definition, let’s just say that when “measuring” market sentiment, you are essentially trying to figure out if the prevailing sentiment among market participants when it comes to a certain asset (an individual stock, for example) or asset class (Chinese stocks in general, for example) is bearish/pessimistic or bullish/optimistic.
In an earlier article, we have mentioned that fundamental analysis is let’s say more diverse than primarily chart PA-oriented technical analysis. To continue with the comparison in question, market sentiment analysis tends to be even more diverse, for reasons that tend to revolve around the fact that traders and investors use a wide range of oftentimes completely different metrics to draw conclusions about Chinese assets in our case or let’s say assets in general.
- Those who have enough capital at their disposal to hire talented programmers use highly complex custom-made data mining software, which essentially scrapes and interprets data from a wide range of websites/platforms, anything from social media websites to major news outlets
- Alternatively, one can simply take advantage of and use the data various social media platforms put at our disposal. For example Google data pertaining to search volumes or Google Trends data, which allows us to essentially chart the interest when it comes to a particular topic based on how search volumes evolved
- Speaking of charting, there are also technical analysis-oriented options, for example drawing conclusions based on the VIX or so-called fear index (with some market participants also having successfully engaged in VIX trading)
- For those more inclined to search for options in the realm of more or less traditional marketing, there are of course a wide range of surveys that are conducted, with data being made public and put to good use by those interested in drawing market sentiment-related conclusions: consumer confidence index surveys which tell us how pessimistic or optimistic consumers are, business owner confidence index surveys which tell us how pessimistic or optimistic entrepreneurs are and so on
… the list could go on and on.
Can market sentiment analysis be effective for those who invest in Chinese assets?
One of the top mistakes made by investors and traders alike is assuming that markets are dominated by 100% rational actors, who sit comfortably in their armchairs next to a cozy fireplace and have developed the skill of setting emotions aside. That is hardly the case, with markets being far closer to the manic-depressive dimension than the previously mentioned description.
A common counter-argument is represented by the fact that let’s say trading is conducted more and more frequently through a wide range of algorithms… by “robots” if you will or artificial intelligence, to be a bit more precise. While such “robots” are of course not exactly emotion-driven beings, the HUMANS who program them most definitely are. Until that changes and AI becomes sophisticated enough to perhaps act without the slightest need whatsoever for human input, the manic-depressive nature of markets is here to stay.
And yes, while it does sound somewhat disheartening to the average observer, the manic-depressive nature of market behavior (with Chinese assets not representing an exception) isn’t necessarily something that leads exclusively to doom and gloom in terms of outcomes. On the contrary, investors and/or traders savvy enough to navigate through waves of market sentiment can actually make this status quo work in their favor through methods/approaches such as smart contrarian investing: buying when there is proverbial blood on the streets (hopefully just figuratively speaking) and everyone is panicking, selling when everyone seems irrationally exuberant, as former Federal Reserve Chairman Alan Greenspan would put it.
Just like with any other approach, strategies are all over the place.
Here at ChinaFund.com, we have our own, which revolves around what we consider to be a very well-crafted mix between various approaches in light of the fact that we would rather not limit ourselves to being a one-trick pony.
Do we include market sentiment analysis in the previously mentioned mix?
Whenever it makes sense and with the limitations mentioned in the article through which we analyze technical analysis, yes.
Does this mean that it has to be our way or the highway? To put it differently, just because the ChinaFund.com team chooses a certain approach that it believes works best for Chinese assets in particular but other asset classes as well broadly speaking, does this mean our approach is the only way to go?
Of course not.
This author at least can easily point to individual investor/traders who do well by making decisions based exclusively on market sentiment analysis. The same way, it isn’t difficult to think of individual “fundamental analysis only” success stories, nor is it impossible to find let’s say “technical analysis only” one.
While we consider our approach to be the best mix we are capable of putting on the table for our own strategies (strategies we are more than happy to share with clients, with them being able to choose approaches which range from simply adopting our models to extracting whatever value they deem appropriate from them), this doesn’t mean there aren’t multiple other ways of skinning this proverbial cat.
As always, the name of the game when investing or trading is figuring out what works best for you and/or your organization. Furthermore, should their needs be dramatically different from ours, we would be the very first to recommend a modus operandi to clients that is miles away from our own. As any team of consultants should know, it’s ultimately all a matter of being flexible enough to provide tailor-made solutions that maximize results for one client or another rather than aim for “one size fits” all narratives.