The other day we recommended purchases of Kinder Morgan (KMI) and Energy Transfer Partners (ETP) (ETP is a key holding of Action Alerts PLUS), as we saw bottoming signals. Unfortunately, prices have continued to slide (some might say skid or tumble, depending on where you are long from).
The question of the day is whether one stays with a position that is not working, or if it is better to take flight. To date, we have applied some basic technical indicators in our analysis -- moving averages, On-Balance-Volume and the Moving Average Convergence Divergence oscillator -- but sentiment is a tool that is useful when applied at the right time.
What is sentiment? At the beginning of technical analysis in the U.S., back in the 1880s, traders looked at just price and volume -- the two things from the marketplace. In the aftermath of the 1920s bubble, a supplemental approach developed called contrary opinion. Contrary opinion, in my opinion, was the start of sentiment.
Today, sentiment can be broken down into three categories. First is what people are doing with their money: Are they buying puts or calls? Are they extending out the yield curve? Are they buying stocks or bonds or gold? Second is what people are saying -- or surveys. For example, are money managers surveyed by Barron's all bullish or all bearish for 2016? When everyone is leaning one way, it can be smart to leave the crowd. The last category of sentiment is the most fun -- anecdotal evidence or stories. This dates back to the 1920s, when Kennedy or Baruch or some other Wall Street baron stopped for a shoe shine on the corner of Broad and Wall. The story goes that the shoe shine boy asked for a tip -- not money but a stock market tip. When this happens, or when a financial story makes the cover of Time magazine, it is typically late in the game.
Does any of this fit for ETP or KMI? At bottoms, the mood is negative, so negative you can cut it with a knife. People are buying at the money puts or dumping positions. As an analyst, do you get push back on your bullish opinion? All this is hard to measure and very subjective. I think we have some of this extreme negative sentiment in place, but a candlestick reversal pattern will be the quickest way to know if the worst is over.
Check out our additional coverage today of Kinder Morgan, here.