MackTheKnife's Blog : Sentiment Analysis: How Do You FEEL About It?

Rereading certain posts on this blog, I can understand any reader who has come to believe that fundamental analysis (F.A.) and technical analysis (T.A.) dominate my work as an equity investor and trader. (Mainly because they do.)

F.A. tells me what to buy or sell, while T.A. tells me when to do it.

However, sentiment analysis (S.A.) also plays a role in my work. The key difference between my F.A. and T.A. on the one hand and my S.A. on the other hand is that I carry out the former analyses in rigorous, systemic ways and conduct the latter analysis in a nonrigorous, nonsystemic way. Accordingly, I am now in the process of bettering my approach to analyzing sentiment to bring it into alignment with my approaches in the other two areas. (If one is not getting better, then one is getting worse.)

Historically, my proprietary brand of S.A. has been based on the following five factors, either alone or together with one or two of the others:

1. Analyst Opinions: Obviously, Zacks.com is an excellent resource for finding the average brokerage recommendation (ABR) for a stock, as well as the online source of its Zacks Rank (Brokerage Recommendations: tinyurl.com/yvm5jr).

As Zacks.com advises us on the above-linked page, Anika Therapeutics Inc.'s/ANIK's ABR ranks it first among the 199 companies in its Zacks industry group. Of course, there is only one analyst covering Anika in Zacks' universe. Coincidentally, ANIK is also my top name in the biotechnology industry ("Bio Bing Fab Five: No. 1, Anika Therapeutics": tinyurl.com/24bszr).

2. Patterns of Insider Trading: Many investors and traders like it when insiders buy stock in their own companies and dislike it when insiders sell stock in them. Personally, I do not care either way. However, I do want a working knowledge of the patterns of insider trading at my actual and potential portfolio companies. Several Web sites are helpful in this area, including my all-time favorite source of information associated with the U.S. Securities and Exchange Commission/SEC (Edgar Online: tinyurl.com/2u7kmg).

As Steady Eddie indicates via the SEC Forms 4 flooding the above-linked page, there have been absolutely, positively huge waves of insider selling at Emergent BioSolutions Inc./EBS recently. As a result, there are investors and traders who would avoid the stock like an adjustable-rate subprime mortgage with fleas. Me? I loves the EBS. In fact, I booked a nice 11% gross profit on a small real-world position a few weeks ago, with the time in the market only 14 days. Even though I anticipate the insider selling will continue for a while, EBS remains one of my favorite biotech plays ("Bio Bing Fab Five: No. 4, Emergent BioSolutions": tinyurl.com/25kzdx). At this point, however, I see it not as an investment but as a trade, so I will be buying on share-price weakness and selling on share-price strength ("MTK's Trading Post: Lather. Rinse. Repeat.": tinyurl.com/2dabld).

3. Patterns of Institutional Trading: My two primary interests in this area are (A) whether institutional ownership in general is increasing or decreasing in my actual and potential portfolio companies and (B) which institutions in particular have positions therein. Therefore, I find very useful the following page on the Nasdaq site (Holdings Summary: tinyurl.com/2tv7nd).

As Nasdaq notes on the above-linked page and others linked to it, the tutes have been boosting their positions recently in American Oriental Bioengineering Inc./AOB, which is not only my favorite name among U.S.-listed Chinese stocks ("Playing the China Cards: Ace of Spades, American Oriental": tinyurl.com/2bf3hh) but also one of my favorite plays in the biotech industry ("Bio Bing Fab Five: No. 5, American Oriental": tinyurl.com/37djfy).

4. Put/Call Ratios: Once again, Zacks.com is a great resource for locating the put/call ratios (PCRs) of some issues (Put/Call Ratio: tinyurl.com/yuxqgx). Its PCRs are provided by Schaeffer's Investment Research, one of the brand names in S.A. Incidentally, the flames of my interest in S.A. were fanned years ago by my reading of Bernie Schaeffer's The Option Advisor, which I recommend to any beginning investor or trader considering the option of options.

As pointed out on the above-linked page, the PCR of the United States Oil Fund/USO is currently 4.27, which is a bit high. Due to the fact I own puts on USO at present in the real-world and Simulator portfolios, this number may mean the smart money and I are on the same side. Or not.

5. Short Interest: The Nasdaq site offers both contemporary and historical snapshots of short interest in U.S.-listed stocks (Stock Short Interest: tinyurl.com/829kz).

As suggested by the above-linked site, Shorty & Co. have an abiding (and substantial) interest in the Dendreon Corp./DNDN. Because I am long the company's options and stock in the real world, I believe I will be checking this site on a daily basis beginning 1 July 2008. (Heh heh heh.)

The Bottom Line: Together, I think my five factors paint a pretty good picture of Mr. Market's feelings about any given name at any given time. However, I have not employed them to help make buy and sell decisions in any rigorous, systemic way. In almost all cases, I have used at least one of them. In many cases, I have used two. In a few cases, I have used three. But, to the best of my recollection, I have never, ever used either four or five.

Starting here and now, I will do so.

If you have another S.A. factor that has worked well for you, then please feel free to share it in a "Reader Comment," below.

The livelihood you save may be my own!