#79 - Jason Goepfert - “I Would Not Be Surprised at All to See a Multi-Day 5%-15% Decline"

63 minutes

In Episode 79, we welcome Jason Goepfert, founder of SentimenTrader.

Per usual, we start with Jason’s background. It involves listening to margin calls, when “real emotion” would come out. Jason tells us anger and panic were what you would hear, and that people are not necessarily rational.

These experiences and others eventually led Jason to launch Sentimentrader which is, according to its website: “an independent investment research firm dedicated to the application of mass psychology to the financial markets… Our focus is not market timing per se, but rather risk management. That may be a distinction without a difference, but it's how we approach the markets. We study signs that suggest it is time to raise or lower market exposure as a function of risk relative to probable reward. It is all about risk-adjusted expectations given existing evidence.”

The guys discuss some of the mechanics of Sentimentrader – the time-frames of the various models, the inputs, and how most people want just one indicator (but that’s not the best way).

Meb asks for an example of one of Jason’s favorite indicators – it turns out to be the VIX, sometimes known as the market’s “fear gauge.” As of the time of the podcast, the VIX is quite low. One might assume this means it’s about to pop, but Jason tells us nothing works 100% of the time, with Meb noting it can stay low for a long while.

Meb asks how investors – specifically long-term investors – should use indicators like the VIX. Should they pay attention at all? Jason tells us you can use these indicators for color.

Meb throws in a funny aside about a “seafood tower” indicator – the idea being when times are bad, no one orders the seafood tower, but when times are good, towers are stacked at all the tables. And it just so happens, Meb recently had a meal out in which the table wanted a seafood tower…as did at least three other tables at the restaurant that night.

The conversation bounces around a bit, with interesting back-and-forths about the AAII and Investor Intelligence surveys, the potential for “observer effect” to be skewing some results, and how every bull/bear cycle is different and people put too much weight on the market event that’s just happened. Jason tells us that many investors are now saying, “well, stocks probably aren’t going to peak because we’re not seeing the same kind of optimism we saw in 2007.” But 2007 was probably a once-in-a-lifetime type of a peak (and 2009 was a once-in-a-lifetime type of a bottom) – so we shouldn’t expect to see the same readings at those turning points.

The guys breeze through a fun topic next: whether Twitter should be considered a useful sentiment indicator. Jason tells us it’s wonderful and horrible. The problem is we self-select and tend to follow people with a similar mentality as our own. So, we’re largely just in a bit of an echo chamber of our own opinion.  

Meb and Jason go on to cover margin levels and the commitment of traders before discussing the contrary indicator of magazine covers. It turns out magazine covers are not the great contra-indicator they’re purported to be.

Finally, the guys turn to today’s markets, with Meb asking how the world looks to Jason given his experience with sentiment. Jason tells us U.S. equities are optimistic, but not necessarily overly optimistic, and bonds and gold are both “meh,” neither registering any extreme sentiment readings.

Meb asks which asset classes around the globe are, in fact, registering extreme readings. Jason tells us we’re seeing some extreme readings in cocoa, coffee, and grains – the soft commodity complex. He actually provides the name of a specific fund if you’re interested in playing this as an investment.

There’s tons more in this great episode: how today’s cryptos are resembling the internet stocks of the late 90s… why it’s hard to buy, even when the sentiment indicators are signaling you should do so… and the time when sentiment called the markets nearly perfectly.

And of course, there’s Jason’s most memorable trade. It involves a times when all the sentiment indicators were lining up together nearly perfectly. So Jason went in big…and lost big when things didn’t play out as he expected.

What are the details? Find out in Episode 79.

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