Sentiment analysis

The third family of market analysis alongside technical and fundamental work. Its inputs are measures of the crowd rather than of the asset: investor and fund manager surveys, the weekly breakdown of futures positioning in the Commitment of Traders report, implied volatility and the relative pricing of puts against calls, the long and short percentages some brokers publish for their own clients, fund flow data, and increasingly the automated scoring of news and social text.

Two opposite conventions are applied to the same numbers. The contrarian reading treats an unusually one sided position as crowding, on the reasoning that a position already established is a position that has to be closed, so the marginal buyer has already bought. The trend following reading treats the same data as confirmation of a move in progress. Both are conventions, both have boundaries chosen by whoever is applying them, and neither is derivable from the data itself.

The limits are in the sampling, and they are severe enough to change what conclusions the data can support. Each source measures its own population: a broker's book describes that broker's clients, a survey describes respondents who answered, and the positioning report covers United States exchange traded futures while the spot foreign exchange market is far larger and dealt over the counter. Most of it is also lagged. Whether sentiment measures add anything beyond what price already shows is a long running argument that has not been settled.