Episode #79: Jason Goepfert, Sundial Capital Research, “I Would Not Be Surprised At All To See A Multi-Day 5%-15% Decline”

Episode #79: Jason Goepfert, Sundial Capital Research, “I Would Not Be Surprised At All To See A Multi-Day 5%-15% Decline” 

 

 

Guest: Jason Goepfert has been trading stocks, options, futures, currencies and commodities for 20 years. After attending the University of Minnesota with a concentration in Finance and Economics, Jason helped build the online brokerage operations of a major U.S. bank from 5 people into over 300 and a top-10 ranking. His learning curve started to plateau, so he left to help run the operations of a large hedge fund before founding Sundial Capital Research, Inc. in 2001.

Date Recorded: 10/25/17     |     Run-Time: 1:02:53

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Summary: 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.

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Interested in sponsoring an episode? Email Jeff at jr@cambriainvestments.com

Links from the Episode:

• :50 – (First Question) – Introducing Jason Geopfert, Sundial Capital Research, Sentiment Trader
• 2:33 – Some background on Jason and how he got to where he is today
• 8:37 – Jason explains Sentiment Trader and how it works
• 10:37 – Who the sentiment models are geared for
• 11:55 – Taking a look at a specific indicator and how it impacts traders; Term Structure of the VIX
• 15:00 – Reminiscences of a Stock Operator – Lefevre
• 16:42 – How should investors use volatility indicators
• 17:22 – “The Three Quants In Their 20s Running A Hedge Fund Making $1 Billion Of Trades Daily” – Forbes
• 18:43 – The Daily Dirt Nap – Things You See in Bull Markets
• 20:14 – Jason’s thoughts on bullish sentiment surveys. (AAII, Investors Intelligence)
• 25:30 – Why you shouldn’t be fighting the last battle
• 27:58 – Twitter’s usefulness as a sentiment indicator, Favstar
• 31:43 – Jason tweet – Markets and turmoil and CNBC Features
• 33:20 – Sentiment and betting
• 36:20 – Margin levels and commitment to traders
• 38:03 – Other indicators that are popular but worthless
• 39:15 – What are the indicators saying about U.S. equities
• 41:08 – What is the sentiment for bonds and gold right now
• 41:41 – Any asset classes experiencing extremes
• 45:27 – Jason’s thoughts on the cryptocurrency space
• 48:10 – A look at some historical sentiment indications that just nailed the perspective of the market
• 53:36 – Other interesting sentiment indicators to think about
• 55:42 – “You Would Have Missed 780% In Gains Using The CAPE Ratio, And That’s A Good Thing” – Faber
• 56:49 – Do fundamentals play a role in the sentiment analysis
• 58:12 – Most memorable investment or trade
• 1:00:29 – Favorite sentiment indicator
• 1:01:58 – Where to follow Jason, com, their blog, @sentimentrader

Transcript of Episode 79:

Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the Co-Founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: Welcome podcast listeners. Today we have a fantastic guest. Early in his career, he helped build an online brokerage operations for a major U.S. bank from 5 to 300 people. He then helped run operations for a large hedge fund before founding Sundial Capital Research. It’s been mentioned in all the publications you know, Journal, Bloomie, Barons, Economist, all that good stuff. He’s also the President CEO of sentimenTrader which is a research firm dedicated to the application of mass psychology to the financial market. Welcome to the show Jason Goepfert.

Jason: Thanks Meb, I’m glad to be here.

Meb: Yeah, so I think you’re dialling in from somewhere in the Great White North, is that right?

Jason: Yeah, just outside of Minneapolis. We’re actually due to get snow here in the next couple of days. So a little bit earlier than usual but the season’s starting.

Meb: We’ll we’re in Los Angeles where they just had the first 100 degree World Series game. So I think we’re sweating it out here but we’re in the air conditioned studio or what we like to call the studio. It’s really our conference room with a couple of microphones.

Jason: I was here in 1991 when The Twins were actually in the World Series the last time and the day after the World Series ended we had a major blizzard. I think we got over a foot and a half of snow in downtown Minneapolis.

Meb: Oh my gosh.

Jason: So crazy extremes.

Meb: That was such a fun World Series. Hopefully this one will be exciting, although the tickets prices were really ridiculous. I was hoping to slide in to some sort of tickets somewhere but it’s crazy. Not surprising being Los Angeles. Anyway, we’ll see. Hopefully they come back to the final series in LA and we get to go.

Anyway, all right, so let’s jump in. Why don’t you give us a little background context. You know, you’ve started a few firms but how you kinda got to where you are today and then we’ll really start to dive in on a lot of the… I got a lot of questions for you today we want a chat about. But just give kind of a quick overview of how you got to where you are.

Jason: Well, I grew up in the North West of Wisconsin so not too far from here. I spent my summers basically scraping cow dung off of barn walls and the winters cutting logs. So I realized pretty quickly when I was a kid I did not wanna do that for my living. Our family had done that for generations so that was kind of in the cards for me and my dad didn’t want me to do it, I didn’t wanna do it. So they kinda really pushed me to do well in school.

So I pushed hard, went to school for finance and economics, enjoyed it, it really kind of fit with where my interests were. So soon after that, got hooked in with Wells Fargo. They had a couple of different brokerage units. One was “online brokerage unit” but it was basically just a discount broker at that time. So I started with them literally in the mail room and I think we had, I think they were five or six people total then.

We hit it just kind of as the markets were taking off. Online brokerage was becoming huge, the mid ’90s there. So we hit it perfectly in and so by the time I left there were over 300 in the unit. So that was great for me because I got to see every piece of the business from the mailroom to management. So learned all parts of it which is a fantastic experience and one of the things that really developed quickly for me was being able to see… Part of my responsibilities was the margin and option unit.

So I got to see applications coming in, got to see our staff making margin calls. For compliance reasons I had to listen to every call and if you ever want to see emotion in the market, if you have the chance, go to a brokerage unit and sit in on some of the margin calls when the market’s moving. There you will see emotion.

Meb: What sort of emotion? Is it anger? Is it sadness? Is it resentment? Is it panic? What was the usual kind of feedback?

Jason: It is anger and panic. Our margin clerks would get yelled at a lot. And the thing I try to stress is they’re not angry at you. You’re the person they can take it out on. They can’t call up Qualcomm and start complaining that, you know, their stock is dropping. I’m sure some do but, so, we’re the person that’s facing the customer and they just, you know, that’s who they’re gonna take it out on.

So a lot of that was just frustration with trying to come up with money or deciding, you know, if they should sell or just what they need to do. And often, you know, these were very quick decisions they had to make because they had maybe a few hours before we would sell out their account. So, you know, you’re adding leverage on top of time pressure and that’s just really combustible.

So the thing that really stuck out to me there was, you know, I went to school for finance and economics. I was taught that people are rational and that was my first experience firsthand with knowledge that people are not rational, at least not all people. And so that really triggered my interest in learning more about kinda the sentiment part of it, just the emotional part of it.

So from there I just started developing some indicators in-house based on, you know, our application flow, how many people were applying from option accounts, how many people were recovering their margin calls or selling out. I just kinda put together this little newsletter type thing, just in-house for trading buddies that were working there. And that was kind of the, I guess the genesis of sentimenTrader but just kind of kept doing that until this was the very late ’90s, early 2000.

Felt like I kind of had learned all I was gonna learn there and jumped over to a hedge fund. Realized quickly that there wasn’t really anything different there, it was basically the same stuff. There were still office politics which I absolutely detest. So left from there and went out on my own and because I didn’t have access to the same data that I had at Wells Fargo or at the hedge fund I was trying to find a place where I could get some of the sentiment data.

You know, the NYSE has some available, The SEBO has some available. But just I couldn’t find one place where it was just all together. So I spent $19 with Yahoo. Yahoo had this e-commerce package at the time. We could create a website for $19. So I did that, just threw up this ugly website that was bare bones and horrific now that I look back at it. And just kinda put some of this data together that I found online and just aggregated into one place. And didn’t really do anything with it, just kind of had it out there for my own use and a couple of trading buddies and then somebody had subscribed.

I got an email that there was a subscriber and I was just like, “Okay, I didn’t really do anything and somebody’s paying for this.” So that kind of got the bell ringing that maybe there’s something to this and so I just kind of pushed a little bit harder and got a few more subscribers. And one of the columnists from thestreet.com Gary Smith had mentioned the site and overnight we got 300 subscribers.

And I was doing everything manually at that point. Every subscriber was in a spreadsheet, every time there was a monthly billing I would have to do it manually. And so I didn’t sleep for days because I was trying to get all of this stuff processed and it was just kind of a crazy time. But that was kind of the kick off to the whole thing that there is an interest in this. That it’s a niche that people are interested in. Perhaps there isn’t really a really good source that aggregates that on the web and I just kind of took it from there.

So I just kinda been building it since then and a few years ago I took on a partner Eric Brown who’s got a doctorate in information systems and he’s just been, I mean, that was just the best decision. Because he’s got all these skills that I don’t have and has been able to build out some great tools like a Backtest Engine and all the stuff in 1,000 years I wouldn’t be able to do.

Meb: Was Gary Smith the technical analysis writer? I’m trying to remember at TheStreet.

Jason: Yes.

Meb: Okay.

Jason: Yeah, he was there for a long time and then he started on “Bulls & Bears” on Fox Business. And I’m actually not sure if he’s still there but he was their main technical analysis guy.

Meb: I used to read his stuff religiously back in the day, man, 20 years ago or whenever it might’ve been. Interesting, we’ll have to follow up later on that. Okay, so, let’s jump in because I got a lot I wanna ask you today. I was reading, you know, one of the descriptions on sentimenTrader on the website and I think it’s a pretty good overview. So I may use this as a jumping off point.

So Sundial Capital Research is an independent investment research firm dedicated to the application of mass psychology to the financial markets. Publishes the sentimenTrader website, the focus is not on market timing per-se but rather risk management. This may be a distinction without a difference but it’s how we approach the markets.

We study signs and suggest it’s time to raise or lower market exposure as a function of risk relative to possible reward. It’s all about risk adjusted expectations given existing evidence. So why don’t you use this as a jumping off point. Tell us a little bit about sentimenTrader, how it works, and just kinda your framework for thinking about sentiment in general and then we’ll start to, you know, get into a little more specifics.

Jason: Basically it comes down to trend in sentiment. Trend is most important. So that always gets the most respect. Clearly, you know, stocks for example, stocks are in an uptrend. So we try to respect that even if we’re seeing an optimistic extreme in sentiment it’s usually not a good idea to just go short just because there are sentiment extremes. So there’s always a balance between the two.

Momentum is part of that as well. Other markets aren’t quite as clear cut because they’re not typically as trendy. Currencies are maybe an exception but a lot of markets are quite a bit more choppy. So using trend is a little bit more difficult than something like commodities or maybe crude oil. They tend to chop around a lot more. So sentiment tends to be more effective or more consistent anyway in a market like that, so it depends on a market.

It would be nice if there was this one, you know, one indicator we could all use, one set of rules that we could all use and that would help us all perform. That’s just, markets aren’t easy. That doesn’t happen. So I mean, that’s the base of it, is respect the trend, when sentiment hits an extreme, pay attention. And when the market doesn’t do what they should after that extreme then you should really pay attention because failures can tell us a lot and people tend to just kind of ignore them.

Meb: So that’s an interesting point. Well, we’ll talk a little bit about that. You know, I think a lot of people when they think of sentiment, they think about, you know, the cover of the magazine indicator, the cover of a magazine or perhaps cocktail party chatter, you know, where everyone’s talking about a particular investment or, you know, how smart they are, how much money they’re making or vice versa on the downside.

So talking about your models in general before we get to some specifics, are these geared towards more intra-day traders or is it long term kinda tactical asset allocators and what’s kinda the timeframe? Is it, you know, short, is it yearly stuff or is it kinda a little bit of both?

Jason: It’s a little bit of both. We have indicators that are updated anywhere from 15 minutes, every 15 minutes up to every quarter. So there’s a wide range there but the vast majority are focused on what we would call the medium term which is one to three months. For some people that’s, you know, long term, for other people that’s super short term.

So I mean it all depends on your perspective but for us, for a lot of the indicators that we follow, a lot of the indicators that people are familiar with, the most effective timeframe is somewhere in that one to three month timeframe. It varies depending on the market. You know, some markets move fast, some slow but most of them are geared to that timeframe.

Meb: I know the answer to this is gonna be certainly not but a lot of people, one of the challenges of sentiment is that, you know, a lot of people just want one indicator and they would say, “All right, well this is my sentiment indicator.” But I’m guessing it’s somewhat of a mosaic approach where some are used are kinda coincident and just used for interest. Some are probably much more specific.

Maybe give us an example of just, you know, one of your generic favourite indicators and kinda talk a little bit about it and maybe also a little bit about that, what you just mentioned which was, you know, the ability for it to be wrong too in what failure may mean if that’s a decent jumping off point for you.

Jason: Yeah, well, if I had to pick one indicator, at this point right now, I would probably pick the term structure of the VIX. So just looking at…

Meb: Oh wow, all right, you’re getting complicated right from the get go. All right, well explain to the listeners what that means.

Jason: Yeah, so it looks at the price of the VIX, the various VIX futures contracts and the VIX is what’s commonly called the fear gauge. This is implied volatility for S&P 500 options over the next 30 days. Most of your listeners are probably familiar with it and, I mean, that’s just a good way to think of it, is the fear gauge. Maybe that’s not perfectly accurate but that’s a good way to think of it.

When people are fearful, they bid up, put options, the VIX spikes. When people are relatively complacent, the VIX is low. That’s not always the case, there’s a very high correlation or inverse correlation to the S&P 500 but there is some additional information there. And so by looking at the price of the different VIX futures contracts from the near term to the medium term we can kind of get a sense of just how panicked people are.

So when the near-month VIX spikes higher and we’re not really seeing that further out, typically it’s a sign that people are panicked right now. And that’s been a real good sign that prices are near a short term bottom at least.

Vice versa to some extent tops are always more difficult than bottoms are or usually anyway. But if I had to pick one, that’s been probably the most consistent one over the past few years where if the indicator reaches an extreme typically the market’s at one turning point or another.

Meb: And so what’s that saying right now? You know, I think we’ve seen a lot in the media about volatility being really low. And honestly it probably hit some pretty, pretty low extremes I would think. What’s your interpretation on the way it looks right now?

Jason: Yeah, it is low. It’s been low for much of 2017. So whenever that happens people say, “Well, see you know it doesn’t work.” Well, you know, nothing works 100% of the time. Sentimental analysis doesn’t work 100% of the times so you’re never gonna get anything that’s always perfect. So it has had some failures this year. It is more of a short to medium term indicator so I wouldn’t say the failures were that bad but they were there.

And recently in the past couple of weeks it did register an extremely low reading meaning that people were very confident. There was not much fear that there was gonna be an imminent correction. So we’re starting to see that quite a little bit now and especially today. But yeah it was recently at a pretty complacent extreme.

Meb: You know, it’s funny as we think about it. I mean, this makes me recall a great, “Reminiscences of Stock Operator.” The newest edition a couple of years ago had an intro or an epilogue written by Paul Tudor Jones the famous macro trader. And he talked a lot about if you had to pick just one indicator, you know, his basis was the 200-day moving average which is kind of astonishing to hear, you know, from this multi-billion dollar fund manager that goes back to using something so simple that’s probably the most famous trend indicator.

And so talking about what you just mentioned earlier, we said, respect the trend, you know, we’re in an up market in the U.S. but at the same time start to realize that we’re having some extremes on volatility. For example, some of the lowest, I think on a couple of measures, October until today was some of the lowest volatility month and some of the lowest volatility readings ever. But you can often see volatility just bump along the bottom until the event happens. And then for prospective investors I think the average VIX rating is probably around…is it probably around 20? Am I right on that or is it closer to like 15?

Jason: It’s upper teens.

Meb: Upper teens, okay, so right ballpark. But it can spike to, the fear is really what, like 40? For panic?

Jason: Yeah. Once it gets past 30 it’s a pretty good sign of fear.

Meb: And then it’s kinda unlimited ceiling after that. You know, you go up to 1987 and estimate it gets all the way up to 80 plus 100. But it’s interesting because a lot of people say, “Oh, my god, this is the lowest volatility day ever.” It doesn’t mean that it has to crash or even mean it has to revert. It’s a sign of the times. And so, you know, for a lot of long term investors is this something that they even need to look at or could they, you know, just ignore it? What’s kinda your perspective on, you know, how robotic using these are? Like, are you actually implementing these with kinda rules based approaches or is it more kinda using it for colour?

Jason: I use it for colour. I don’t do anything systematically which, you know, is to our detriment at times but I do think judgment has a place. I think discretion has a place especially when it comes to sentiment. The rise of these quant funds that just trade purely on price action or whatever metric are a little bit scary because they can’t react. And in fact there was just something in Forbes about three twenty somethings that have $10 million under management and they’re trading $1 billion a day.

And that wasn’t all in NYSE stocks but that would be about 2.5% of daily NYSE volume. And these guys they had one year of trading experience and they’re turning over that much stock. That bugs me. That worries me. The experience is not there, the safeguards aren’t there. You know, in 1987 I have no idea if something like that is gonna happen again, but I would not be surprised at all to see a multi-day 5% to 15% decline in part because there’s too much mechanical going on in the market. There’s not enough discretion.

It’s not like the old days with the four traders and I think that’s gonna end badly temporarily. But that does not mean, you know, a huge bear market. It doesn’t mean anything besides, there’s probably at some point gonna be a major scare where people have to readjust their thinking on some of the stuff that’s been going on based on an extremely calm market over the past, really, you know, eight years.

Meb: Well we’re gonna come back to this later when we talk about crypto but there was a great stat that there’s been like a hundred crypto hedge funds. And the average age of the crypto managers is, I think it’s 24 or 25. So it’s an interesting sign of the times. But speaking of kinda colour a little bit, you know, I read a newsletter writer, a friend of ours we’ve had in the podcast named Jared Dillian who writes “The Daily Dirtnap” and he humorously wrote a piece the other day about the kind of things you see in bull markets.

And he said, you know, you go to a restaurant and you notice it’s really loud and bustling whereas in bear markets people tend to be a lot quieter and, you know the conversations are much more hushed. And so I went to dinner, I filmed a “MarketWatch” panel in Beverly Hills and went out to dinner with the host afterwards. And Jared I forgot to mention said, of this bull market he said, one of the big signs, when you go to a seafood restaurant, is the seafood tower which he says is like one of the worst possible probably things to order because it’s super expensive. And you don’t get that much but it’s just a sign. It’s very ostentatious.

It’s kinda like, you know, getting the champagne at a lounge where they come out with sparklers or something and so you… but I was laughing because not only did my table order one and meanwhile it was delicious, I love everything in a seafood tower as long as I’m not paying. But I saw three others in the restaurant. So that’s a little bit of a, you know, coincident indicator of the bull market which I thought was funny and relevant.

But that’s one of the things, you know, is you see a lot of the sentiment stuff tends to correlate, meaning, you know, a lot of it tends to happen at the same time where you see these signs and echoes. And, you know, you mentioned the volatility is really low. Well often that will coincide with, you know, an uptrend, in a long bull market and also people starting to get giddy.

Talk to me a little bit about some of the bullish sentiment surveys and, you know, on your thoughts, I know there’s a couple of big ones. There’s AAII, there’s Investors Intelligence. What are kinda like, what’s your thought on these surveys in general? Are they helpful? Are they useful? Are they misleading? What’s the general thoughts there particularly with regard to, you know, equities positioning?

Jason: I find them useful. They’re mostly coincident but that doesn’t mean they can’t be useful because typically they’re bounded. So fewer than zero people can’t be bullish and more than 100% can’t be bullish. So there is some use to that once we reach one of these upper or lower bounds whereas stock prices, you know, are not necessarily bound and usually that’s a helpful feature.

So I do find them useful, they all have their uses. Investors Intelligence is probably the most useful. If I had to pick one I’d probably pick that one. But market [inaudible 00:21:07] consensus, you know, a lot of these services have sentiment surveys that are useful, even some of the monthly surveys from the Conference Board or the University of Michigan, they all pretty much track the same, maybe on different timeframes but they typically go up and down together.

The AAII survey, American Association of Individual Investors, that’s probably the most popular one. And I’m not exactly sure why. I think, you know, we’d follow it but it carries no weight in any of our models. There are several issues with it and besides the fact that it’s just become really popular which I think comes with some of these sentiment surveys because it’s what people are saying. It’s not necessarily what they’re doing with their money and I think there’s some observer effect that goes on with some of this.

So, you know, these people that are members of AAII, they’re market participants, I think some of them are fairly active. They see out there they’re a contrary indicator that if they say they’re bullish then, you know, maybe stocks won’t go up then because, you know, people are using it as a contrary indicator. So maybe the next time they take the survey, well they’ll say they’re not so bullish, they’ll say they’re neutral or bearish.

So I think there’s been some impact on the survey because of that reason. I think we’re seeing that with some other indicators as well like the Rydex family of mutual funds. That became a very popular sentiment indicator probably 10 years ago. While people became more aware of it including the people that actually trade the Rydex funds so they change their behaviour. So I think that’s a real danger with some of these indicators especially the ones with, you know, smaller sample size. Hey I probably have 150 to 300 people in their surveys.

The other issue with it is it skews older. So if you plot the AAII survey against consumer confidence of those 55 and older versus those 35 and younger, there’s a really high correlation there. So part of the reason that the survey is very low, it seems like people aren’t very bullish it’s just because, you know, perhaps, people who are older are not very bullish.

Meb: They’re just grumpy.

Jason: But for younger and middle aged… Yeah exactly.

Meb: Grumpy old people.

Jason: Grumpy old people. So a lot of what we’re seeing in the media now is they’re saying, “Well, sentiment isn’t elevated right now, there’s no optimism. People hate this bull market.” The citing in this AAII survey. I think it’s really misleading and it’s kind of a disservice.

Meb: Well there’s two comments I’ll make on the AAII and Investors Intelligence. I mean the AAII I think one reason people like it is it has a long history you can download so people can go look at the numbers. But it did at least get the turns right. I mean, I think the highest bullish reading it ever had was in like January 2000 and I think the least bullish was in March 2009.

You know, at least it got the extremes right but the best interpretation I’ve ever seen of the Investors Intelligence was Leuthold which I think is kinda near you guys, they did an average of the sentiments over the course of the year and then looked at how the performance of stocks did the following year. And found that not surprisingly the 10 highest sentiment years had terrible stock performance.

The next year I think it was around zero and then the 10 lowest sentiment years had great stock returns the following year which I thought was a pretty interesting application that I hadn’t really seen. But it just goes to show that a lot of these surveys, they spend a lot of time in kind of in the middle that’s not that useful. And really, for a lot of the sentiment stuff, it’s only at these big extremes where, you know, it really is the good signal.

Jason: For the most part yeah and the AAII survey is interesting because you’re exactly right and they did mark those two extremes in the market, one high and one low. Most of the time it does not. So like the 2007 peak, bullishness was not very high, it was in the middle of its range right as the market was peaking. Optimism was much less even a couple of years higher. So all through 2004 up to 2007 you saw this constantly declining peak in bullishness among this population which is what we’ve seen over the past few years as well.

So the survey did not nail the top in 2007. It did not nail the top in 1998 or 1994 or 1990. So using it as the end all be all of sentiment, yeah, I think is really sketchy because it doesn’t often give a generational high or low. Most of the time it’s either in the middle or it diverges from price which I think can also provide some information.

Meb: Well, I mean, you talk about this too, I’ve heard you speak that, and we talk a lot about this with valuations and constituent complexity is that every cycle is different, you know. And you mentioned like 2007 looks different than 2000 and there’s a lot of reasons why and I think you had a comment, something along the lines of it’s always gonna be different so don’t fight the last battle.

Maybe you could talk a little bit about that and how the history may rhyme but not necessarily be the same and you gotta kinda keep an open mind about what might be the next driver and the next sign of the next good and bad time.

Jason: Well yeah, I mean there’s all kinds of behavioural biases that are geared to that. You know, recency bias and availability bias and all of these that tell us that we shouldn’t put all of our weight on the thing that just happened. But that’ what we all tend to do. You know, we look at the VIX, while the VIX’s price is supposed to be on future volatility but it has an exceptionally high correlation to historical volatility.

So people are pricing in the future based on what it just looked like in the past. And we see that a lot with indicators and with markets. So right now people are saying, “Well, you know, stocks probably aren’t gonna peak because we’re not seeing the kind of optimism that we saw in 2007.” Well no, but 2007 was probably a once in a lifetime kind of a peak. 2009 was a once in a lifetime kind of a bottom.

So you’re not gonna see the same kinds of readings that you saw at those turning points. There are a lot of different bear markets throughout history. You know, there’s 25, 30 of them and each one of them looks different. Each of the bull markets looks different. They’re all different lengths, they’re all different magnitudes. And so that’s one of the big challenges is nothing ever looks like it did in the past. You might get something that rhymes a little bit but mostly it’s gonna be something different.

And you look at this cycle and you look at the influence of, you know, you’ve got now the passive versus active flow. You’ve got all of this private equity money that’s distorting some of these indicators. You know, look at the number of IPOs, people are saying, “Well, you know, we’re not seeing giddiness right now because we’re not seeing this big surge in IPOs like we did in 2000.” Well, no that’s because they don’t have to have an IPO there’s all this private equity money.

So if you’re looking for that indicator, you’re not gonna see it. You’re probably not gonna see it for years if ever because these companies are not gonna go public. So, you know, each time is different. You have to use a little bit of judgment and just kinda take a weight of the evidence approach and see if it adds up.

Meb: Interesting, and it kinda goes back to thinking of everything as a mosaic. So we have a little website we love to use called Favstar that lets you rank someone’s all time most popular tweets. So I’ll read a couple of yours in a minute. But talk to me about Twitter in general. Is that something that, you know, is kind of a new entrant? Is that something that’s useful, you think, as a sentiment indicator or is it something we should maybe be a little cautious about?

Jason: Twitter is a wonderful horrible thing. It can be the best tool out there in terms of real time collaboration with people that you would never be able to collaborate with otherwise. And it also attracts kind of the dregs of human society. If you go and look at the comments of almost any tweet, you just kinda wanna give up on everything. So it’s useful kind of as a broadcast mechanism. It’s becoming more difficult to use as a collaboration tool. And I think using it as a tell on sentiment is really dangerous because we self select our Twitter universe. We determine who we’re gonna follow and we tend to kinda follow the people with a similar mentality as us.

So, you know, if we’re generally optimistic, typically we’re gonna follow people who are optimistic. And so if you use their Twitter stream as a read on sentiment, well that’s really skewed because you’re basically just seeing optimistic people and vice versa. Vice versa is probably then, you know, kind of the zero hedge community I think is even more dangerous. But so trying to read sentiment based on this self selected sample is just fraught with risk.

I think there’s more interest and more use in having, kind of, some kind of a machine learning algorithm that learns sentiments on Twitter, uses the language of Tweets. In fact my partner, Eric Brown did his doctorate on that. And that can be useful especially on individual stocks, some sectors and even kind of the broader ETFs.

But again, you know there are funds that have been developed to trade based off Twitter sentiments or stock tweet sentiment and they really struggle because it’s the game theory thing. Well if these other funds see this fund performing well maybe they’re gonna populate twitter with some fake tweets which is super easy to do. So even using it in a quantified manner I think is really challenging. There is something there. It’s hard to use.

Meb: I think there’s a lot of insight there where, you know, most of the listeners can relate to even the election, you know, and everything that’s gone on in the past year.

Jason: Absolutely.

Meb: And talk where a lot of people use Facebook and they have this echo chamber of following other people that are in their own universe and so they live in this bubble of where there’s political views or religious views or market views.

And it’d actually be interesting to try to combine maybe 10 or 20 of the biggest, like, permabears personalities on Twitter and then maybe 10 or 20 of the biggest permabulls and then maybe you could talk to your partner about this and get them to, like, say study, all right, we’re gonna do a word cloud of all the people they follow or that follow them. And then all the word cloud of all the people that, are the permabulls or study and I’m sure you’d see just a totally different conclusion.

And that’s the hard part about listening to market news in general is, like I’ll find myself, and this is why I’m a quant is I’ll find myself reading a research report. I just read one the other night, they were sending out to the idea forum and I spent the entire time thinking, “Oh my god, the conclusion is you have to sell everything and buy a bunch of putts.” You know, like, that’s the emotion I felt and thankfully I’m a quant again but so I don’t have to worry about it. But you can see why people who consistently get that drip, IV drip of good or bad news or whatever that just reinforces, it’s tough.

You had a great example, it’s actually one of your most popular tweets was you said, this was a funny one. It says, this is likely incomplete but you said, “It’s paid to be a buyer when CNBS pulls out its markets in turmoil feature.” Do you remember that tweet?

Jason: Yeah. And they kinda stopped doing it after that and I had kind of a little tip with some of their producers that were saying, “Well you omitted some of our specials.” And I said, “Well, so send me the dates please.” Because I went through their feed, I went through their Facebook accounts of all of their personalities and I’m fairly certain I’ve got all of the dates that they ran one of these specials. And invariably they ran it, you know, after the market declined a few percent.

Well, partially this just works because it was a bull market but almost invariably when they ran one of these specials, the market turned around that day or a day or two later. So you know we’re seeing something now with president Trump. He very much loves to tweet after the Dow had set a new high, after, you know, it’s been on the news. His buddies at “Fox News” are giddy about it and so he’ll tweet a screenshot.

Well then there’s a pretty high correlation between the volume of these tweets and future market performance even though it’s been up a short time period. But even if you look at just the average return I think the most consistent was four days later. There’s a stark difference between how the market performs after he tweets about the stock market and when he doesn’t. It performs much better after he doesn’t tweet.

So, you know, some of the stuff is just kinda for fun and you can’t really necessarily use it for, especially for investments but maybe even for trading. But you know, like you said about a mosaic, it all kind of comes together and gives you a bigger picture of the overriding sentiment out there.

Meb: That’s really funny you talk about Trump tweets because I don’t really bet on sports or anything else, prediction markets. But when the Mayweather-McGregor fight came along I had done a quant study, I was joking with friends, I said, “Here’s all the prop bets.” You know, how long is the national anthem, who’s gonna, you know, wins the fight and there was a prop bet on how many times would trump tweet during the day of the fight. And it was at 6.5 and I went and studied his last, like, six months of tweets and found that his average tweets per day were 12 and that on top of that they included the POTUS account.

And so I said, “This is an amazing bet.” For whatever reason, the sports book isn’t accounting for how many times he’s gonna tweet. And then on top of that, and this is if you’re like a good fundamental stock analyst you say, “Okay, what does the market know? What is the market not accounting for?” Well this was also the weekend that the hurricane was coming into Houston. And so I said, “Oh my god, he’s gonna tweet 500 times and I’m gonna bet everything I have on this.”

You know, of course, I’m not because one, Vegas won’t take the prop bets on this. And if they do they max out like 100 bucks and so then I was using one of my friend’s online sports books because of course I would never use an online sports books.

Jason: No, of course.

Meb: But one of my friend’s online sport books and then you can’t bet that much then because it’s probably located in, you know, Aruba and then it’s gonna disappear into the ether. So, I bet and of course what happens, Trump tweets like five times and then just goes dark and then just doesn’t tweet.

He goes to bed early I guess. And although the POTUS account retweeted like 10 tweets and so I of course was like, “Hey, according to Twitter’s terms of service a tweet that’s been shared is called a retweet.” And so I’m like, “This is a tweet.” And of course you know what happens, he wakes up the next morning and literally tweets like 75 times. But it’s such a great example of, you know sure things and markets and bets and, you know why I’m a quant.

Jason: That side is the best example of sentiment I’ve ever seen because I think it was the day before the fight. I’m not sure if it was ESPN or what service had it on but they had a bar graph of the number of bets on Mayweather versus McGregor versus the dollar amount bet on each one.

And I forget the proportions but the vast majority of bets, the number of bets were placed on McGregor. The vast majority of money was bet on Mayweather. So you saw basically a few large smart money people betting everything on Mayweather and the Hoy Poy [SP] betting on McGregor.

Meb: The bet size was like $100 on McGregor and like $100,000 on Mayweather.

Jason: Yeah, absolutely. So when you’re looking at the difference between smart money and dumb money there’s, in my entire career I’ve never seen a more stark divergence than the betting on that fight.

Meb: And meanwhile Meb’s just sitting here. So I set up alerts on my phone for Trump tweets which I haven’t turned off yet. That reminds me to go turn that off because I get alerts all day long on these insane tweets. All right let’s go back to markets, investment markets. I’m gonna bounce around a little bit. You guys do anything with margin levels or commitment to traders at all?

Jason: Yeah, both, margin is, I mean, it’s fine, we track it but there’s typically not much information there. It goes higher when stocks go higher and goes lower when stocks go lower. So to me the most use I’ve seen with it is looking at the rate of growth in margin debt versus the rate of growth. In an index we use the S&P but it doesn’t really matter.

So what you saw in 2000 and 2007 was you saw this huge growth in margin debt over and above whether it be I guess rational versus the growth in stocks. So we haven’t seen that even to a close extent since then. So, you know, when you see or the idea that we’re not saying excessive optimism that would be one example of it just that we’re not seeing the rate of growth in margin debt that we saw in 2000 or 2007 relative to what would be rational.

So there is some use to it but the vast majority of time it just does what it’s expected to do and yeah the level is high. There’s not much cash in these accounts. So when you look at kind of a net worth figure, take the cash balances from the margin debt, it’s hugely negative, even when you put that in relation to market cap.

But historically that’s not a great indicator. It wouldn’t necessarily have gotten you out in 2000 or 2007 and prior to that, in the prior decades it was really random. I mean, it was basically useless. So that’s one of those indicators again that’s pretty popular. The media likes to cite it. Fear mongers like to say “Well that’s at all time levels.” That’s all true but I don’t think it’s that useful.

Meb: What are some of the popular ones that you think are just kinda bonk or that you think that the media loves that’s really just kinda worthless?

Jason: You’ve mentioned magazine cover indicator earlier. That’s one too that every time people see a cover they think, “Well, you gotta check the other side of that.” Markets are not that easy. I’m sure this has been done before but I did a study of every Barons cover, I don’t know how far back I went, as far as I could, years and years and years and it was mostly a non contrary indicator. I think their success rate was, it was between 50 and 60%. It was fine.

So the market typically did what they thought it was going to do when they put it on their cover. The only one that I’ve seen that’s really convincing is the economist cover. And to their credit they actually ran a story in the economist about how their own covers were contrary indicators. They supplied a historical feed of the covers to a couple of economic researchers. They studied the markets over various timeframes and they found that it is actually a pretty effective contrary indicator of the next year. So again it’s one of those things that’s pretty popular, you hear a lot about. Mostly it’s useless but there are a few isolated good examples where it can really help.

Meb: All right, so I’m now gonna ask you about kinda how the world looks today and we’re gonna bounce around a few different asset classes and we’ll see if you have any thoughts on sentiment on these and for a lot of them probably the answer probably may just be, you know, “Meh.” where there’s nothing going on. But let’s start with the biggie. U.S. equities, what are kinda a lot of the indicators saying now? What’s your suggestions on the positioning as far as lengths is bull? And what’s your takeaway?

Jason: Well certainly optimistic, whether it’s overly optimistic it’s questionable. There are a couple of things that are holdouts. You know, people will cite the AAII survey or something like that that has no weight with me. But the thing that I’m really confused is fund flows. When you look at the flow of funds into equities or out of equities, we’re not seeing really even optimism. And it doesn’t fit with almost everything else that I’m looking at and I don’t know the reason. I don’t have an explanation for it. It’s just one of those exceptions that’s a big exception to me. So I would classify it as optimistic.

Typically when you’ve got levels like this, returns going forward are subpar. The thing going for equity is momentum and so I’ve done a ton of momentum studies over the past couple of months really and they’re extremely consistent in that when we see the type of momentum we’ve seen in recent weeks and months it’s very rare to see a big decline going forward. It’s a little less consistent in the short and medium term but longer term, six months to a year it’s really rare to see even a minimal decline.

So you’ve got kind of a battle there between extreme sentiment and extreme momentum, typically shorter term sentiment will win out so you’ll see a subpar returns, longer terms momentum will win out so acute, I would say, some kind of decline that wears off this excessive optimism but then another, you know, rally that satisfies some of these momentum studies.

Meb: So summary is more Trump tweets to come. All right, what about two other favourites of the AAII crowd, bonds and gold, anything going on in there?

Jason: No I would say, “Meh.” for both. Bonds we’ve seen a lot of really built up pessimism early this year, February March and then that returned to optimism in August. Since then it’s just kinda been wearing off. Gold just has not been doing much. The price has moved but sentiment has been kind of stuck in neutral and you know when sentiment is stuck in neutral there’s just not a lot of information there so just not much of an opinion I need to win.

Meb: All right, next. Are there any asset classes experiencing kinda extremes? You know, I know, there’s been some in the past few years that have gotten whacked like Energy did, anything that comes to mind?

Jason: Yeah, Energy was one of those set ups you don’t see very often where everything came together. This was in early 2016. Metals and mining, that was another sector that just was kind of a… everything was coming together. I think we’re seeing something very similar right now in commodities. And commodities is a broad group and it’s hard to just say, well, commodities, they move. There’s not necessarily a whole lot of correlation there among them.

So, when you look at some of the soft contracts like cocoa and coffee and especially the grains and the kinds of sentiment readings we’re seeing now are similar to what we were seeing in metals and mining and energy in early 2016. So if there’s one asset class that I’m excited about from a longer term point of view, something that an investor would probably be interested in, it’s that, it’s kind of the soft commodity complex.

And that’s not really easy to take advantage of. You know there are funds like DBA that are geared specifically towards that but then you’re dealing with, you know future’s role on some of these other issues. Double Line has a good community fund but that’s not really geared towards that, it has some other features to it. A lot of people like to invest in the companies instead of commodities themselves but then you look at commodity stocks and they’ve already run up so it’s kind of a hard place to be but, you know, if I had to pick one it would be a fund like DBA that’s more geared towards the actual contracts of some of these softer commodities.

Meb: You know, it’s funny, for being someone who’s been going to a lot of these conferences in both retail and institutional for the past 20 years, you see a lot of themes. And certainly in the mid 2000s commodities was like the headline panel in every single conference where institutions all of a sudden were waking up to commodities, oil was at 100 or 120 bucks a barrel and you know a couple of very influential commodity paper started coming out in the mid 2000s and everyone of course rushed into commodities and of course what happened, commodities have since done very, very poorly and then we’ve the opposite in the last handful of years.

You never see commodities as a topic on any of these conferences and they’re kinda universally hated and a lot of institutions are selling their commodity positions and, you know, it’s so funny to see this sorta rinse repeat sort of environment. But yeah, I think to me also any time you have an asset class that’s down in multiple years in a row is usually a time that it starts to get sort of interesting. And then a lot of historical studies show that it’s usually a great time to be building a position as well and starting to see a lot of negative sentiment there.

But it’s perking up in a few areas. Base metals have had a great year this year. But it’s funny, you know, I think a lot about the, one of my buddies Steve Sjuggerud talks about, you know, collectibles in investing and thinking about what the next generation may really care about and gold and precious metals to me is an interesting one because at least in the U.S. I don’t see the younger generation really caring at all but I also don’t know that if the price is determined globally that that’s really the use case if it’s not totally determined by China and India at this point.

Anyway that was a long ramble, it wasn’t even a question. My favourite investment cartoon is one of these black and white cartoons and the guy finishes his speech says, “We’d now like to open up the floor to questions designed as, oh sorry, short speeches designed as questions.” So my question wasn’t even a question, it was more of a statement, random, okay.

So talk to me and one of your other great tweets, one of your most popular tweets was you overlaid the number of internet funds with the number of crypto funds launching on two different time series, so one was the late ’90s obviously with internet funds now with crypto. What are your thoughts on that space? Is that an area that is seeing kinda crazy sentiment? Is it hard to measure, what’s going on there?

Jason: It’s extremely hard to measure so I mean we’re in early days with that even though it’s been around for a few years. We’re not seeing the kind of data around it even though it’s… which is weird. You would think there would be more data but there’s less than most other markets so getting actual sentiment data or positioning data is really difficult for that. It’s something I’m always looking at and just not having a lot of the success right now.

But if you just look at some of the anecdotal stuff, you know, the number of fund openings it tracks very closely to the late ’90s. You look at the name changes some of these companies are going through and then their stock takes off. Well that’s very reminiscent of anybody that lived through that 1999-2000 time period, we saw the exact same thing. You look at Overstock yesterday announced some initial coin offering, so a lot of these companies that are outside of the space trying to take advantage of it and people are bidding up their stock to crazy levels, that never ends well.

I can’t think of one time where that did not indicate some level of fraud. And just you know, if you look at the blank cheque companies, just people throwing money at these companies assuming that they’re going to do something in the block chain space with those funds. It’s all tracking very similar to what we saw in the late ’90s with internet stocks and it’s probably gonna end the same way. I mean, I have no inside knowledge of block chains. These guys are much smarter than I am. I think the underlying technology much like the internet is going to last, it’s going to be potentially even revolutionary, most of the stocks are gonna be worthless. Most of the coins are gonna be worthless.

Meb: So you’re saying that you shouldn’t be following Paris Hilton and Mayweather and who’s the other actor that came out? I can’t remember. I’m promoting the…

Jason: probably not your best bet.

Meb: All right, well, shoot. It’s interesting because that space, it reminds me of in the mid 2000s there was a huge interest in SPACs, Special Purpose Acquisition Company where these blank cheque companies would raise $100 million, a billion dollars and then just go find someone to buy. It’s such a strange, you know, structure where people would invest in this management team that didn’t even have a company yet and they would go out and find someone to buy. That has kinda gone away. You don’t hear about SPACs hardly at all anymore and I guess they’ve taken their place with ICOs.

All right, so talk to me, I wanna hear about a little going back in time a couple of examples where you may just have some fond or really terrible dark memories. What sorta historical sentiment indicators do you look back on at a point in time and say, “Wow that was just really a perfect set up or example”? Where maybe one indicator or a whole slew were firing and you know, it ended up being like a really, really good call. Are there any particular examples that you think are great examples of sentiment just working fantastic?

Jason: Yeah, I think last February, so 2016. That was almost perfect. I mean it wasn’t that much of a correction. You know Ned Davis and some of the other firms will call it a bear market and that’s probably accurate because if you look at the median decline of most stocks they were down 20% or more so, you know, even though the S&P…

Meb: And I think S&P guys are like 19.5 or something.

Jason: All right which is so stupid to say, well we weren’t in a bear market. Being so inflexible like that I just think is not a good way to go. So assuming it was a bear market we saw a lot of indicators that were just panic ridden and they pretty much nailed below that time. So, you know, sometimes it just, it works perfectly. Sometimes, even like at the bottom of 2009, a lot of the stuff had lined up. A lot of the stuff was showing extreme, okay, this is the end of a bear market kind of stuff and then you saw something like [inaudible 00:49:33] ratios which are very widely followed and there was extreme optimism.

So you know again, you kind of have to take the mosaic approach because if you only follow [inaudible 00:49:43] ratios you would say, “Well, clearly people are way too optimistic and we’re not at the end of a bear market.”

But markets change and you know, maybe people were using some kind of a stock replacement strategy and call options instead of, you know, holding the capital in stocks. So, there’s always exceptions. So I would say that’s probably one of the most stark examples of not relying on a single indicator otherwise you would’ve missed a huge opportunity in 2016 then you’ve got something where I… you know I’m sure I could find an exception but almost everything was lined up at that point saying, “Okay, this is probably a really good buying opportunity.”

Meb: That’s interesting. You know, it’s funny if you think about sentiment because when it lines up it’s the exact opposite of what people wanna do. And the example I give is over the past five years we’ve been giving, kinda speeches around the world on valuation and stock markets and we’ve had sort of the same message where we say, “Look the U.S. is expensive and getting more expensive.” It’s usually pretty unpopular in the U.S. but no one cares and then I say, “The rest of the world is much cheaper and a lot of these countries are really cheap.”

And I’d been giving the talks in a lot of countries where they were expensive and so finally I’d given some talks a couple of summers ago in Eastern Europe in areas that were really, really cheap and I was so excited because I said, finally I’m gonna have a popular talk and the room’s gonna love me but I went and gave the talk and it was just silence, you know, when I said, “Hey look you have this really cheap stock market it should do double digits, aren’t you excited?” You know, and they didn’t care because they’d already experienced the loss.

And so when you’re down 40%, 60%, 80% it’s kind of a no duh like obviously this is probably cheap and nobody has any money has any money to be doing anything and on the flip side, you know, like in the U.S. if you think about the mid 2000s with real estate or the late ’90s with internet stocks is that, you know, no one wants to sell that point. They’re like, “What are you talking about? I’m buying my fourth house to flip. I can’t sell now. This is when I’m gonna make all the big money.” So it’s an interesting, you know, challenge for a lot of people when the sentiment lines up to actually pull the trigger and follow through with it. I think but that’s what makes it probably so worthwhile.

Jason: Sold your house in 2005 and then your buddy just bought a boat because his, you know, home equity went up another $100,000 in 2007 you’re gonna feel like an idiot and that’s really painful. And if you buy too early when everybody else is panicking and saying, “Oh you can’t buy, you can’t buy.” Again you’re gonna feel like an idiot. That’s really hard and it takes kind of an iron constitution to be able to wait in on either side and go against the crowd.

And it doesn’t always work out. Sometimes your buddy is right. Maybe we’re seeing that right now with Bitcoin and some of these other things that are taking off and, you know, some of us from the cheap seats are just kind of giggling and maybe they’re the smart ones. But historically, probability wise, you know, probably not and, you know all we can do is play with probabilities.

Meb: And historically buying investments that don’t have any cash flows is not a great trade. But it’s funny you’ll see the Bitcoin on Twitter where people will go find these people these poor souls who’ll tweet something like, “Man, I should never have sold my Bitcoin at 30 bucks now it’s at 100 four or five years ago and now it’s at $5000.”

Or retweet them and then these poor, talk about the foam all that generates where a lot people are like I can’t sell my Bitcoin now it just hit 5000, what if it goes to 10 or 20 or 50 or a million, you know, and that’s the sorta behaviour you see but again, like, that’s what bubbles are, people make a ton of money in the final stages of bubbles and whether Bitcoin ends up at 50,000 or 500 or zero, you know, who knows. I’m like you I’m sitting in the cheap seats eating popcorn and enjoying watching it but not something I really wanna participate in.

Okay, so are there any asset classes or sentiment readings that you think are particularly interesting that I’m leaving out? Is there anything that we haven’t? And we’ve done a pretty wide global coverage. Is anything that’s on your mind or that you’re working on that you think is particularly notable?

Jason: Yeah I mean it’s, most people are interested in, well, stocks number one, bonds, number two and gold probably a close number three and like I said those latter two I don’t really see anything interesting there. Stocks are interesting but conflicting and like I said, you know, commodities is probably is the most interesting one from either perspective but particularly a long perspective. I just, I think that’s where opportunity on a risk reward basis is probably the highest.

Within stocks, again there’s a lot of just mixed readings or neutral readings among countries. If you look at Qatar if you take like a 50 to average of an optimism index that we calculate, that’s really low, it’s probably the lowest it’s been in four or five years and we don’t see that very often with countries so some of these Middle East countries are getting pretty oversold in terms of excessive pessimism. But other than that a lot of it is just really mixed.

Meb: I mean the way that we think about U.S. stocks that I’ve been talking about and saying, look, you know, this really great long bull market and you know people kind of realize that stocks are probably expensive but they just don’t know what else to do. So they end up having kinda the going back to the whole do what you say, do what you actually do if you look at the percentage of household net worth in stocks, I think it’s the second highest it’s ever been.

And usually that alone is also a pretty good indicator of future returns but I think it’s a scenario of they just don’t know what to do and so it’s like an uncomfortable long. And so it’ll be interesting to see, you know, when markets start to decline how that sentiment changes from being kinda regrettably long and invested where they don’t really wanna be long but they don’t know what else to do when it starts to decline, who knows? Every bull and bear has a different personality so it’ll be interesting to see how it plays out.

Jason: Well we just had a great paper about using Cape [SP] as kind of a timing mechanism and even if you got out in the early ’90s when Cape was really high, you could’ve done well by switching into some of the lower valued countries and with so many opportunities now more than we’ve ever had before investing within the U.S. market, outside of the U.S. market, people have never had so many options which, you know, can be bad because you get kind of a paralysis by analysis situation but there are other opportunities. You don’t have to be invested in the S&P 500 spider, there are other thousands and thousands of other opportunities and not all of them are really expensive.

Meb: And that’s a hard part. We often say it’s tough to be asset class agnostic, you know, because it’s familiar and warm and fuzzy to be investing in the FANG Stocks or everything in the U.S. but you know, really the world is your oyster. At least that’s what we say. So Listeners start to look into Qatar and the AGS and everything else on the menu of investment choices.

Look I would love to hold you for a long time, a couple of more short questions and then we’re gonna have to let you go. Do fundamentals ever play a role in sort of your analysis when you’re thinking about sentiment? Is it something that if they do, do you look for agreement or disagreement or anything else or is it something you kinda mainly ignore?

Jason: I do look at them personally. I don’t really discuss it very much. I think people can get much better information elsewhere. So it’s something I think about, it’s something I consider. But everything, you know if you’re looking for a comprehensive investment outlook I think you need to tie it all together. I think the fundamentals are important, I think the technicals are important and I think the emotional side, the sentiment side is important.

So, you know, like our mutual friend Steve Sjuggerud, he looks for something that’s cheap, hated and in an uptrend. So when you kind of fuse all of them together I think your odds are much better. So it’s not something I really discuss much. It’s important. I mean, of course the fundamentals can be important but a lot of the stuff goes together as well.

You know, if you’re seeing excessive pessimism that’s because the fundamentals are poor and valuation is probably low. So, you know, when you look at one aspect, it ties into the other aspects as well so typically they confirm each other. But it’s hard to time when fundamentals are, you know, at their worst point or their best point and that’s where sentiment and to some extent technicals can help you with that part of it.

Meb: Tell me, this is a question we also ask podcast guests and is thinking back to your own personal history, do you have a most memorable investment or trade and it can be positive, it can be negative, it can be whatever it may be but when you think about kind of your lifetime in investing is there one that particularly stands out?

Jason: Many, I will give you my worst because it’s, you know, the pain is actually still raw even though it’s been three years actually. So this was I think it was June of 2014. We were having one of those times where everything was lining up. Everything was pointing to, stocks were probably peaking, not a bull market peak but just there should be a correction looming and I literally mean everything. Every single thing I looked at, every kind of analysis I do was saying we should have at least a 3% to 5% correction.

So like an idiot I violated all of my rules, I bought the worst thing you can possibly buy which is volatility ETF. I know all of the caveats about those, I know the weaknesses but I was completely convinced that we were going to see an uptick in volatility imminently and I was completely wrong. So this was, I think was in June and the market kept ticking higher, volatility kept ticking lower to where it was getting to historic levels. And so I think I managed through mid July and ended up losing 22% of the trading account that I was using for this.

And soon after that, of course, you know, the market actually did have its volatility event and that would’ve made out well but at some point you have to reach a pain tolerance and get out so, you know, the lessons from that are, well, they were many but I violated everything, all of my trading rules, I let the last get way out of hand, I used an inappropriate product, I became somewhat emotional, not really, I mean I think if you look back at some of the stuff I’ve written I think it would probably be hard to tell that I was actually suffering a pretty big loss in my trading account but yeah, that really sticks out as something to never do again.

Meb: I’m laughing not because of your story but Jeff is over here, my co-host is shaking his head and I think his was with you in that same trade so yeah it looks painful on his face as well. I don’t know if we asked you this question or not. If I did I apologize, do you have a single favourite sentiment indicator? Like your own pet personal indicator if you had to just pick one?

Jason: Yeah ironically it’s one of the indicators that got me into that trade. It’s the VIX term structure. So just looking at the difference and the various VIX futures contracts and that was one of those times that basically had perfect record up to that point. So when it got to that level, volatility always jumped immediately and so that’s one of the reasons I had gone so heavy into this trade. And you know it teaches you humility. The market will teach you humility over and over and over again.

Meb: I wonder what’s the lowest VIX you think we could print? I mean I think we’re already down to a nine-ish in change. Is eight even a possibility? Is that something that… I mean we’re in a world of negative sovereign bond yields. So who knows? Anything’s possible.

Jason: Yeah if you would’ve told me a month ago that in October the VIX would be in the low 9s I would say no, never so never say never because…

Meb: It’s bananas. Yeah.

Jason: And especially now with so many products tied to the VIX who knows? You know, it could be screwy and we’ll see readings that we’ve never seen before. Maybe it can go up to 200 because some of these, you know, products are focused so tightly on this one niche and we’re gonna see readings that we’ve never seen before.

Meb: Well, good we have a tail risk fund so we’re betting on it to some degree.

Jason: Smart move.

Meb: Jason it’s been a blast. Where can people go to find you if they want more information on your work, what you’re up to, what you’re tweeting about, what’s the best sources?

Jason: Yeah, just sentimentrader.com. There’s a blog on there with some free stuff or just Twitter @sentimentrader.

Meb: Jason, thanks so much. It’s been a blast.

Jason: Thanks, Meb.

Meb: Listeners, we’re gonna post all these show notes and links to Jason’s site, maybe some charts all the stuff we talked about today because there’s a lot and we’ll post it up online. Thanks for taking the time to listen everybody. We always welcome feedback, in questions, in snacks and anything else you wanna send us. For the mail bag get feedback in the mebfabershow.com. You can always find the show notes, other episodes, mebfaber.com/podcast. Subscribe to the show on iTunes and if you’re enjoying the show, hating it whatever, please just leave a review. Thanks for listening friends and good investing.