Kass: How to Short

Sentiment Studies Are Sometimes Skewed

As I have mentioned previously, I don't put much credence into the various sentiment studies, most of which can be subject to, well, very subjective interpretation.

It is my view that, within the context of the investment process, sentiment studies are often simplistic, linear crutches, especially when used in a vacuum.

For example, a lot of the short-interest figures are influenced by structural market changes and the introduction of new securities that require hedges on the other side -- or investors on the other side.

Surveys can also be undependable because they often rely on relatively small samples.

I am aware of instances in which the respondents simply didn't tell the truth or the surveys relied on the bias of advisors or letter writers who "teach" but don't "invest."

Finally, many -- inflicted by a bout of affirmational bias -- massage the output to produce a desired outcome (e.g., if you don't like the fact that last week the AAII Bearish percentages have moved to close to a one-year low, change your calculation to a 12-month moving average that doesn't exhibit as much of an extreme reading). You get the picture.

Also Look at Fundamentals

In conclusion, technical analysis plays an important role in the investment mosaic, but making investment conclusions solely by observing squishy sentiment measures can be dangerous to your financial health.

I believe there is far too much emphasis on unreliable sentiment voodoo that can be interpreted any which way and often too little emphasis on economic and company fundamentals (which, by the way, are also open to affirmational bias).

And those fundamentals are fading faster than you can say Sanjaya Malakar.