Utilizing analytics to measure “leader” sentiment and react accordingly

Largest weekly drop for the major stock market indexes in over 5 years, as the “follower” and “GOTW” {“get outta the way”) segments of investors took their cue from the “leader” segment – the well-informed institutional investors, also referred to as “the smart money” – on increasing concerns that China’s economic slowdown will adversely affect businesses globally.

Last week’s decline has garnered much media attention, although our analytics have been revealing a “stealth” bear market underway as the “leaders” began selling stocks and selling short as far back as 8-10 weeks ago. By utilizing analytics to measure “leader” sentiment and react accordingly, we become leaders among the small investor class rather than followers or GOTW investors, whose delayed reactions diminish their investment gains.

For those of you able to sell short and well diversified, these past few weeks should be among your most profitable of 2015, with so many Level 1 positions short and declining further for very significant gains. For those of you unable to sell short, the few long positions eroded last week, but you should be holding significant levels of cash, which is the next best situation – far superior to the losses being incurred by passive (long-only) investors – in some instances as large as in the downtrend of 2008.

The only investor segment yet to react is the fourth and final segment, the “buy-and-holders”, and it remains to be seen next week whether this segment will reach the panic stage and drive the market lower with emotion-driven selling after the damage to their portfolios is already done. If this does occur, it may be followed by a market rise as “the leaders” take advantage to reacquire stocks at fire sale prices. Either way, “the leaders” remain our guide, for maximum investment return potential.

For passive investors with portfolios that mimic the Dow30, Nasdaq Composite or S&P500 Indexes, they are looking at investment losses of -7.6%, -0.6% and -4.2% respectively, 33 weeks into the year.

Highlights: 2 new weekly highs in recent positions. Double-digit long gain in PLNR +31% (2 wks).
14 new weekly lows. Significant double-digit short gains as follows, all in 12 weeks or less:
HPQ +16%
SFUN +27%
NVIV +32%
ABUS +42%
BAS +55%
MAT +12%
PDS +37%
ERF +41%
ECA +50%
MDXG +14%

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