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Computerized Investing > September/October 2004

Feature: Investor Sentiment as a Contrarian Indicator

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by Wayne A. Thorp, CFA

Sentiment describes the opinions, emotions or views of a group of people. In investing, sentiment can be a powerful determinant of security prices, especially in the short run. Here, emotions—whether rational or irrational—can drive market prices. The price at which an individual security trades is the sum total of the sentiment of all market participants. If you could forecast changes in sentiment, you should have an advantage in determining changes in the market. The problem with sentiment is that it’s really only known after the fact.

Market sentiment—the summation of all expectations for the market as a whole—often directly reflects where the market has been, not where it is going. When market sentiment is low, the majority believes the market will fall, while high market sentiment means that the majority feels the market will rise in value.

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Discussion

Jon Dearborn from CA posted 27 days ago:

FYI In figure 4 I think it should read 8/21/1987
instead of 8/21/1997.


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