Sentimentally Yours

Bloomberg recently profiled Joe Dinapoli in what can only described a hagiographic piece of work. While I certainly don’t begrudge Mr. Dinapoli his multiple Bentley’s, his massive mansion in Arizona and his fame and fortune let’s just say I remain sceptical. Mr. Dinapoli, for those of you who are not familiar is a technical guru who is famous for a series of indicators that many retail and hedge fund investors swear by. Mr. Dinapoli’s most famous client is Stevie Cohen of SAC. But if you’ve been reading the news lately, you know that Mr. Cohen hardly gets his prognostications from a series of obscure numbers that border on astrology. Mr. Cohen’s just issued Wells notice suggests that he makes money the old fashioned way.

In any case DiNapoli numbers may well have merit, though I remain doubtful that any pattern trading formula has any long term merit. If I sound like a guy who is skeptical of algos, that because I am. This you may find highly ironic since I spend 15 hours a day looking for algorithmic ideas in the FX market. But it is perhaps because I spend so much time with price data that I am very wary of its forecasting abilities.

In fact I am wary of technical analysis altogether. Again ironic from a guy who looks at technicals all day long. Yet there is one thing in the Bloomberg article that I agree with wholeheartedly -- technicals are very good at measuring sentiment. And sentiment is highly unappreciated as the key driver of trade.

Fundamentalists will argue economics until they are blue in the face inventing obscure indicators to seek guidance like ancient oracles looking at animal entrails. Yet they miss the most important aspect of trading -- it doesn’t matter what the absolute truth is. It only matters how markets feel about it. Economic data matters only if the markets react. If they don’t it can be detrimental to your account because your sentiment will be at odds with the market.

This is one area where technical analysis can be of use. There are a variety of indicators that can effectively measure the strength of sentiment in the market. Of course just because the market “feels” about something right now, does not mean that it will continue to feel that way a minute, an hour, a day or a month forward. But at least by looking at technicals you get an unvarnished view of what IS happening rather than what you THINK should be happening. Selling when sentiment is negative and buying when sentiment is positive is never a guarantee of success, but as Damon Runyon once said, “The race is not always to the swift nor the battle to the strong, but that’s the way to bet.”