Understanding Stocks

13
C H A P T E R
The Psychology of
Stocks: Introduction
to Sentiment Analysis
Sentiment analysis involves studying psychological clues to help you
determine where the market is headed. It is not as clear-cut as fundamental
or technical analysis, but it is just as important. Understanding
where the crowds (what Wall Street calls the herd) are investing their
money will help you decide how to invest. Usually, when you find out
where the crowds are investing, you do the opposite!
Sentiment analysts use a number of tools to determine market psychology.
For example, when the market was going into the stratosphere,
every psychological indicator showed that people were gorging on
stocks. The market went up so far so quickly that Alan Greenspan, the
Federal Reserve Board chairman, remarked that investors were suffering
from “irrational exuberance.” He made this comment in 1996, four
years before the bull market ended! Although market psychology was
telling us that stocks were due for a nasty fall, it took four years before
it actually happened.
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