Sentiment drives markets, and many participants have known that for a long time. You can never know what market participants actually do, and you should never rely on their social media posts or public comments. Markets, like card games, are highly influenced by bluffing.
Many market participants have found in the last 12 years a simple fact: too much bearishness drives the markets up. Therefore, adding to bearishness can actually lead to a gain on the long side.
Lots of people appear bearish but are buyers. They are called "bluffers." Why? Because extreme bearish sentiment moves up markets. I distinguish between what people say and what they do, something that can't be known. BTW this was major play in last 12 years. $SPX #ES_F
— Michael Harris 📈 (@mikeharrisNY) March 25, 2022
Some extremely bearish pundits are still around and are bearish. Normally, they would have been out of business. However, these market participants know that gains come from the losers. They may appear extremely bearish at times, but there is no way of knowing what they actually do. My guess is that they fuel bearish sentiment because they know that drives the markets up. This is one reason sentiment is mostly noise in forecasting market direction.
The best way to avoid this trap is to ignore people who try to influence sentiment. How do you know when they do that? Search engines may provide valuable insight. I have kept a huge archive of market predictions and it’s mostly the same people now who 10 or 8 years ago were calling bear markets. They are still around, and every few months they come out and forecast another bear market. Do we know their actual positions? The answer is no. In my opinion, these are bluffers. They try to shape retail sentiment to turn bearish because they know the market gains most of its momentum by squeezing out weak hands.
When some people appear to have a strong view about the market and continuously do so without changing from bear to bull, they may have an agenda. Obviously, markets go down and bear markets develop, but if you are getting your information from a bluffer, that could be costly.
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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.