My colleague Chris Johnson writes often about the sentiment of the market and the sentiment toward a particular stock.  I use sentiment analysis in my evaluations as well.

I start with a group of charts and look for bullish or bearish picks based on the technical formations I am seeing.  Then, once I have composed a bull and bear list, I look at the sentiment toward these particular stocks.  And I have to tell you; sometimes the best thing about sentiment is that it keeps me out of trades.

Let me give you two examples of recent trades that I did not make because of the sentiment.

The first one is Research in Motion (RIMM).  On June 27, RIMM appeared on my bearish list, as the stock dropped below its 20-day moving average and was tremendously overbought on its 10-week RSI.  The first chart below shows the drop below the 20-day moving average and the second one shows the 10-week RSI.

Thankfully when I looked at the sentiment on the stock, I chose not to make the trade.  As you can see, RIMM shot straight up on June 29 and July 2 after the company reported earnings that were above expectations.  The stock jumped more than 25 percent in two days.

So what about the sentiment didn’t I like for a bearish play?  The analyst rankings showed that there were 26 analysts following RIMM and of the 26, only nine ranked the stock as a “buy.”  This told me that there was more pessimism than optimism on RIMM and that any positive comments could send the stock sharply higher.

Had I bought puts on RIMM like my technical analysis suggested I should, I would have certainly been faced with a 100-percent loss.  Thank goodness I researched the stock further and looked at the sentiment.

The second trade was brought to my attention by a colleague who made a compelling case for buying puts on General Motors (GM).  This was based on the stock hitting former resistance in the 36.70 area and the stock being tremendously overbought on both the 10-day and 10-week RSI.  From a technical perspective, the trade made sense, but I changed my mind when I looked at the sentiment.  Again, I give you the daily and weekly charts and the day the trade was brought to my attention.

Rather than stopping with the technical analysis, I looked at the sentiment and found that GM was one of the most hated stocks on Wall Street.  Analysts had three “buy” ratings, four “holds,” and four “sell” ratings.  On top of this, the short-interest ratio was pushing five.  This once again told me there was more pessimism than optimism on the stock.

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I chose not to make the trade, but my colleague did.  GM jumped above resistance on June 27 and rose again on the 28th.  My colleague took a 39-percent loss in two days.  I was fortunate to sit this one out.

I have two points here.  First, sentiment is a great determining factor on whether or not you should make a trade, even if you are primarily a technical analyst.  The second point is that you have to be diligent about doing your homework before you make a trade.

Not only should you find more winners this way, but you will also avoid some losing trades.

Good luck and good trading,

Rick

In addition to earnings season shifting into high gear this week, the economic calendar is quite full.  The Fed minutes for the last meeting will be released on Thursday and that will certainly garner a lot of attention, as investors get to see what the Fed is looking for going forward.

There will certainly be more information for the Fed to digest as they continue to balance their focus between inflation and growth.  The inflation reports (PPI and CPI) for June will be released on Tuesday and Wednesday, respectively.  Analysts expect both to be contained, with PPI expected to come in at 0.1 percent compared to the 0.9-percent reading in May.  The CPI is expected to come in at 0.1 percent as well, which is much more moderate than the 0.7-percent reading in May.

Turning our attention to the growth side of the argument, there are three reports for the Fed to focus on this week.  The NY Empire State Index comes out this morning, while the Philly Fed Survey and Leading Indicators report come out on Thursday.  All three of these reports are expected to be a little lower than the previous month’s reports.  Apparently, analysts are not as optimistic as the Fed about economic growth.

Date

Time (ET)

Statistic

For

Market
Expects

Prior

16-Jul

8:30 AM

NY Empire State Index

Jul

17

25.8

17-Jul

8:30 AM

PPI

Jun

0.10%

0.90%

17-Jul

8:30 AM

Core PPI

Jun

0.20%

0.20%

17-Jul

9:00 AM

Net Foreign Purchases

May

$70.0B

$84.1B

17-Jul

9:15 AM

Industrial Production

Jun

0.30%

0.00%

17-Jul

9:15 AM

Capacity Utilization

Jun

81.50%

81.30%

18-Jul

8:30 AM

CPI

Jun

0.10%

0.70%

18-Jul

8:30 AM

Core CPI

Jun

0.20%

0.10%

18-Jul

8:30 AM

Housing Starts

Jun

1450K

1474K

18-Jul

8:30 AM

Building Permits

Jun

1490K

1501K

19-Jul

10:00 AM

Leading Indicators

Jun

0.10%

0.30%

19-Jul

12:00 PM

Philadelphia Fed

Jul

13

18

19-Jul

2:00 PM

FOMC Minutes

28-Jun

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-

The Internet Sector … will be in the spotlight this week, as three of the biggest players report earnings over the next four days.  Yahoo! (YHOO) reports tomorrow night after the close, eBay (EBAY) reports after the close on Wednesday, and Google (GOOG) reports after the close on Thursday.  Expect a volatile week in the sector thanks to these three earnings report.