Market Sentiment: How can be measured?

A lot of traders are using indexes or at least the major one to see if the market is going up or down or does not move in either way as sideways movement. This a very helpful technique that used by traders and investors to see if the market is willing to pay some profit in either way by going long or short, or if the market is not moving at all which can be better to stay out of it.

Many traders and investors alike using S&P 500 as a gauge for market sentiment to see if the market is about to have a new breakout move or continue its original one before they trade or invest in any stocks. This approach is more helpful for traders and investors because it will prevent them to invest or trade in phases where market is not going any way, or even worst when it move or start move in downtrend.

But the question to ask here, is measuring market sentiments by using S&P 500 is a good approach or there is another index that is better in measuring the market sentiment rather than S&P 500.

Before answering the above question let us understand what is S&P 500 and how can be calculated?

S&P 500 is simply an weighted average for 500 companies. These companies are the most largest companies in U.S economy. Some of those companies have higher weight than others based in their size and how big financially are such as Apple, Microsoft. As the name imply there are 500 companies in this average. Some of these companies are consider leaders of U.S Stock market, such as Apple, Microsoft, Google, Amazon, while there are so many companies that included in this index are considered a lager companies.

From statistic point of view, when the sample number is increased the average for that sample is almost coming to normal and anomaly will be disregard. To make this simple, when there is a bad companies in that average are mixed with good companies, the value of those bad companies will be disregard since their value will not affect the average specially if those companies are smaller in weight than those good one. That was the reason that S&P 500 index broke the top that made in Feb 2020 in beginning of this year, even if there were so many companies are reporting bad earning report.

S&P 500 Break Resistance

But what if the sample size is been minimized to 200 or 100 or 50 or may be 30 such as Dow 30 index. What will happen in this case?. The answer is obvious, the average will be more sensitive. That means when there is an anomaly appear, the average will effect immediately either if that anomaly was good or bad. And here comes the important to take Dow 30 index which is known as Dow jones industrial average as measurement of market sentiment.

Dow 30 consist of the biggest companies of all sectors of the stock market. It vary from technology companies to petroleum companies as well as banks and pharmaceutical companies. The variation of these biggest companies and the limitation of this average to consider only 30 biggest companies in U.S economy which make this average a unique market sentiment specially when investors or traders want to know if it is a bull or bear market.

For example, in 2020 where coronavirus pandemic started the market wiped all its profit since 2016 in just five weeks. All other indexes such as S&P 500, NASDAQ and other European indices have been recovered from that drop except the Dow 30 which still failed to reached the top that made in Feb 2020 as shown in the pictures below:

S&P 500 break the top reached in Feb 2020
NASDAQ 100 Break the top made in Feb 2020
Dow 30 failed to break the top made in Feb 2020

As we can see from the above charts there was an anomaly. These indices should be aligned with each other and broke the top made in Feb 2020 in order to prove the sell off that started in Feb 2020 has been recovered, but since Dow 30 still did not break that resistance made in Feb 2020, it will be hard to tell if the market has been recovered from coronavirus effect or not.

Alignment for all indices is important in order for traders and investors to tell if they are in bull/bear market, and Dow 30 index shows through years if the market is in uptrend, downtrend or sideways. That does not neglect the importance of S&P 500, or NASDAQ composite, they are both good tools to measure the market sentiment, but when it come to overall result, I believe Dow 30 has the final word to decide if the market is about to move either way.

Growth: Why its important to company’s Stock

Growth is one of the key element that investors should study carefully when they are investigating company’s financial records. It can be used as leading indicators that company earning will increase in forthcoming future. That simply because company’s growth has an ability to increase its earning, which means its earning per share (EPS) will increase and there will be a lot of demand on its stock on the market.

For example, if Company X has increase in growth like opening new stores every year in new different places, that means its sales will increase because products of that company which used to be sold in one place, now it sold in multiple places which means its sales will go up. Once sales increase the profit will increase too. And when the profit increase the earning per share of company’s stock (EPS) will increase, which make company’s stock on high demand for many financial institutes and big banks and others who want to have some of that company, that eventually make its stocks start going up in its price and start its bullish wave.

Growth is not something like earning once it released today its effect can be seen tomorrow in company’s stock price. However, when company’s growth increase for at least 25% you have to wait for the next two quarter earning reports. When you see improvement in (EPS) in the first quarter wait for the second quarter for confirmation or more better to wait for the third quarter, because this increment in (EPS) which happen in first earning report after increase in growth might be temporary but once you get confirmation on that you can invest in that company. So to make it clear:

you have to wait until you see improvement in company’s sales and earning for at least 3 consecutive quarters after an increment in its growth by 25% or higher.

But what if a company increase its growth and there was no improvement in its sales or earning for at least one year or five consecutive quarters, here the company’s growth did not reflect in its earning and/or sales which means there is something wrong in this company, and once you find something wrong in any company, that discovered by linking facts from company earning report, the smarter and wiser thing to do is to run a way and don’t invest in such company.

Earning is what matter

A lot of investors and traders searching for complex algorithms and techniques as well as advanced strategies to maximize their profit in the stock market. They go through a lot of websites and tutorials to find that piece of the puzzle to help them start making more profit in the stock market. They came to cross a lot of strategies that one of which depend only on the fundamental analysis of company financial reports that released quarterly, while the second of which depends only on technical analysis and studying the history of stock’s price to predict its future movement. Finally, the third of which tries to mix between fundamental analysis and technical analysis in order to end up with better investment or trading strategy that will maximize their profit and help them to pick the winning stock from 5000 or more.

In their journey in searching for this strategy which might help them in making a good decision in picking the winning stocks, they forgot to ask them-self the most crucial question which is why companies exist?. The importance of answering this question is the main criterion that helps people to pick the winning stocks.

Companies around the world exist for one simple reason and that is making a profit. If the company did not make a profit or keep losing money it will be obvious that this company will go out of business very soon. So those investors and traders should look for companies that make a profit and eliminate those which did not from their screening process. But there is another question to ask here which is what if the screening process end up with many companies that made a profit, How can the wining stock rightfully selected among those stocks?.

The answer to this is simple, the wining stock is the one that belongs to the company that made more profit than the rest and that profit reflected in its stock. What I mean by that is to choose the stock that its EPS ( earning per share) has been doubled since the last earning report or tripled or maybe hit new records.

In order to do this properly, investors, as well as traders, should go to the previous earning report for company under investigation, and find how much was (EPS) in last quarter, and check the current (EPS) by the time it’s released immediately, and once

current (EPS) >= 2 * previous (EPS)

then they can select these stocks and invest in it, or trade it for the coming quarter until releasing next (EPS). Once the new (EPS) is released and it is equal or greater than the (EPS) that help them choose the stock in first place, they can keep this position in this stock, but if the released (EPS) is less than the (EPS) that helped them investing in first place then they should exit this position and look for new stock to invest or trade.

To test this strategy I invite you to go through S&P 500 index and investigate the leading companies in that index such as AppleMicrosoftGoogle and Amazon, and others, to see how much did these stocks move from low prices to reach all times highs and that only happened when (EPS) of these companies have been doubled or tripled.

Stocks market is a complicated environment, and it’s controlled by supply and demand as well as greed and fear. Investors and traders don’t need to add more complex variables to this environment to choose the winning stocks. Instead, they should simplify the complexity of this market and stick to basics that will help them to choose the best stock that will maximize their profit.

How smart money play Market

Many of us heard about the smart money but few understand what does it mean and how also it plays market and manipulate it and made it moved to its favor as much as it could.

Smart money simply is refer to shares belong to people who are own a lot of company stocks. The bored members of the company whom they have so many shares of its stocks under their control. They did not called it smart money because its more smarter than our money or because its IQ is way higher than others. They called it smart money because its belong to company’s decision makers and to first people who will know if the company make so much profit in this quarter before any other party, or if it did not sustain its profit for this quarter as it promise.

So based in this giving fact, the smart money is the first one to know if there will be a problem in the next earning report of the company before anybody else in the world. Those people will know if the profit will go beyond the expectation which is good for company’s stock, that allow them to start accumulate stocks as much as they could before releasing the earning report because they new that once the report is released the stock will goes up and make new highs that may be never made before. On the contrary, when the company did not made that much profit in its quarter or may be there was a lost in the earning, smart money will be the first to know about that and they start selling some of their shares before the price goes down and made profit before the stock drop.

But this is not the only way smart money manipulate the market with, because I am assuming it should be known to all of us that smart money has access to information before it become public.

The trick or method used by smart money, which is more smarter than the previous one, that used to manipulate stock market and made other investors confused and made them don’t know what to do is manipulating the guidance. But before I jump to explain what is manipulating guidance mean, let me define the guidance first.

Guidance report or as know guidance earning is simply the company expectation about its earning in the next quarter. Like for example if the company has an earning per share or (EPS) is 3 $ for this quarter but the company still believe it will double this (EPS) for the coming quarter. That means the earning guidance for the company is positive about the next quarter at least which means that its sales will increase and its profit will increase as well. But when the same company released its earning report which was (EPS) 3 $ but it mentions that somehow the earning will go down in the next quarter, which means that there will be drop in sales and profit, that means the earning guidance for this company is negative.

Both negative or positive earning guidance has impact on the stoke which made it drops some time to 5% or may be starting its correction phase, or may be stock will go in bear move that made it loss ,more than 15%-20%. Or on the other hand, it might make the stock to start soaring and going up in its bull move.

The effect of positive or negative earning guidance combined with positive or negative earning report respectively is clear for most people, but what will happen if the opposite was the case. How the stock will react to a positive earning report with negative guidance or negative earning report with positive guidance. That where the mess happen and here where the smart money or board members can manipulate the stock market. Because by law they cannot fake earning reports, but on the other hand, they can fake the guidance report and provide misleading information about it.

The smart money can fake the public by giving positive guidance while the earning report still negative in order just to make the financial institutes and other firms jump into buying this stock to end the accumulation phase and make the stock to start its uptrend, and the opposite is true, smart money might provide negative guidance to stock even with positive earning report to just let the financial firms get rid of this stocks and end the distribution phase of the stock and let it start drop in down move, and this is where smart money can manipulate the market. They can give misleading information that does not add up with fact investors already had which is earning report to made the stock of their company end accumulation phase and start going up or end the distribution phase of stock and made it goes down.

Either way, smart money at the end will win, and if you are an investors which means that you bought stocks and hold them for as minimum as (five years) you don’t need to wary about smart money manipulation for the stock they own, you just need to go with the fact that you had in front of you in the earning report and make your decision to either invest in this stock or not. But if you are trader who bet in stock’s price not in the company itself you need to pay careful attention to these type of information, and try to align your trading decision with smart money movement.

Investing vs. Trading

A lot of people asked me about the difference between investing and trading. I keep telling them that there is slight difference between these two methods or styles regarding the Security markets as well as commodities and Forex. Investors always buy and hold for long time like for example 10 years at minimum, while traders on the other hand juts buy security to sell it may be within a hour or may be less or sometimes they keep it for months. Also investors are always watching the companies finance to see which one is more better than the other, but traders are not interesting in these kind of stuff , instead they are interested in seeing if the price rich 52 weeks high or lows , and how this price will react against specific support and resistance level. This explanation still did not deliver my message to all those who still asking about the difference between these two type of people, until I realize new way to tell people what is the real difference between investors and traders which is really simple and straight forward.

Investors are betting in companies. They see potential in a company and put their money and invest in it for long time to see if this bet was right or wrong and they don’t care if it was wrong because they manage their money very well and diversify their investment in so many companies that they don’t want all them to be successful. Instead, they just want few of them to be successful and they don’t care about others. Because the success of one company where they invested in it, is willing to cover all their losses and made them rich for the rest of their life. Good example for investors is Warren Buffet and Venture capital investors who are willing to invest in so many companies and they are not looking for all of them to be good investing, instead they are looking for only one company to be successful and the rest they don’t care about it because the success they are waiting for is not 10% or 20% or 100% in investment, they are looking for a profit of 2000% or may be more in their investment.

While traders betting in stocks or security price itself and see if there is a potential that this price will move up or down based in their analysis, they will buy or sell that stock or security accordingly. Traders’ money management is different than investors’ money management. They are looking for 10% to 20% or may be in best scenarios they are looking for 100% profit, and they always put stop loss orders where they don’t want all their money to be wiped out and loss everything if the market goes in the other direction against their interests which made them exposed for the risk that all their stop loss to be hit before the price goes in their favor and loss all their money. Because of that they never made a lot of money or if some of them is good and was able to made some profits in trading is because he/she are so experts in money management.

To summarize my point, investors have the potential to made a lot of money in stocks market or other financial market than traders because they are using time in their side and have the ability to wait for long time in order to their betting to be fruitful.