I was glad to spend some time with you today in the Daily Diary. 

Don't forget to diversify your portfolio!

Earlier today, I shared a post about my sentiment indicators. To expand on this, here are a few graphs showing the performance of those indicators across Russell 3000 stocks over the past 10 years. 

You’ll notice that the higher the rank, the better the forward performance. The Spearman's correlation is 0.92, indicating statistical significance. The top-ranked bucket of stocks delivers an 18% return, compared to just 2% for the bottom-ranked stocks, showcasing a clear and meaningful spread. 

It's not perfect, but is useful for me.

Since it is difficult to value Bitcoin based on cash flow measures, technical analysis techniques could be helpful. The truth is a lot of traders are using it. 

One tried and true technique is the "measured move." Based on the long-term trend of Bitcoin, a traditional technician would probably see a large cup-with-handle pattern and would measure the range of the base and extrapolate it above the high to get an upside target. Based on the chart now an upside target would be $126,763.  

The next traditional technique would be to look for retracements for buying interest. Typically, a 33% and 50% retracement would be used from the most recent high.  Based on that, potential support is around $89,776 and $85,199. IMHO, trading is usually improved if you trade ahead of those numbers to avoid excessive slippage. 

I'm looking to add to my existing position in DocuSign  (DOCU) , on a potential pullback even though the stock is performing well, because I still find the valuation attractive.

The third-quarter earnings announcement is expected on 12/05/2024. The consensus EPS estimate is $0.87, with high and low estimates of $0.91 and $0.82, respectively. I anticipate potential short-term volatility before or after the earnings release, but as long as the reported earnings are on track, I remain confident in the position.

Doug Kass recently asked me what sentiment indicators I use and how they influence my trading, so I thought I’d share my approach.

Defining Sentiment

First, let me explain how I define "sentiment." Sentiment indicators measure how investors perceive a stock’s prospects, without considering fundamentals. Why is this important? Early in my career, I learned that even a company priced as a great value can sit as dead money without the proverbial catalyst. Sentiment helps identify when a value stock might be ripe for a rally.

The second way I use sentiment is to ride trends in stocks with strong fundamentals and a long runway for growth. I call these "quality on a roll" stocks. Sentiment indicators can also signal when these stocks may be nearing exhaustion and are due for a pause or decline.

Sentiment Indicators I Use

Changes in Earnings Expectations  

I look at several metrics to gauge analyst sentiment because this affects money flows and is an effective indicator that forecasts returns if analyzed correctly. The key is to view analyst numbers at the margin:

o Estimate Revisions: The percentage change in earnings estimates, typically over four weeks.  

o Earnings Surprises: The difference between actual and estimated earnings.  

o Recommendations: The current average analyst recommendation (buy, hold, or sell) compared to historical averages.

Momentum

Momentum is a versatile indicator, and I use it in two ways. The indicators are calculated as percentage price changes in the stocks and the industry groups over multiple time frames.

o Intermediate-Term Continuation: Stocks with strong intermediate-term momentum tend to outperform in the near term, especially if the most recent short-term data is omitted.

o Short-Term Mean Reversion: Stocks with large short-term moves (e.g., over one month) often reverse, making short-term momentum a valuable mean reversion signal.

Short Interest

Short interest can reveal bearish sentiment, but extreme levels can also indicate a potential rally if shorts are forced to cover.

Industry Momentum

Stocks often follow the sentiment of their industry, so I factor in industry-level momentum.

Constructing and Interpreting Indicators

To construct these indicators, I use percentiles to compare data cross-sectionally across my investable universe. I then blend these into weighted averages to get a "big picture" view of sentiment trends.

I use this information as one input alongside fundamentals. As a longer-term investor focused on capital appreciation over six months or more, I prioritize both quantitative and qualitative fundamentals. Quantitatively, I analyze quality and valuation metrics in a manner similar to my sentiment indicators, with adjustments for industry-specific factors.

Why Sentiment Matters

Quantitative sentiment indicators are invaluable because they provide context when paired with fundamentals. By measuring the gap between sentiment and fundamentals, I can better assess the extent of current trends and make more informed investment decisions.

Ultimately, there are many ways to approach investing, but for my process, sentiment is a critical piece of the puzzle.

I'm not sure the current gold trade will be as fruitful as this guitar. I bought it 20 years ago at Eric Clapton's inaugural Crossroads Guitar Festival — "Guitarmageddon" — in Dallas, Texas, for $2,000. Now, it's worth over 10x that. Its gold-infused top, inspired by a Japanese kimono, makes it a standout. 

It's a J. Custom, handcrafted by elite luthiers in Japan. For comparison, the same $2,000 in gold would be worth $13,000 today — not bad, but this guitar strikes a better chord! 

International stocks are underperforming the U.S. stock market since Trump won the election. The tariff worries will probably lead smart value investors to sharpen their pencils looking for new buying opportunities. 

Investable ADRs I follow are also under pressure. I'm watching for acceleration to the downside and then stabilization. Expect a fast-moving news cycle and retaliation with higher volatility.  

Traders still favoring tech stocks based on MarketGrader's Sentiment indicator...but actual fundamentals are not doing as well. 

Speculators are likely to buy Bitcoin on the dip. Here's a list of ETFs as of 11/26/24 that focus on Digital Assets ranked by AUM. The biggest ETF has $46 billion. The retail investor is probably not full yet implying the top isn't in yet. 

In late 2023 this iconic instrument fetched $1.27 million at auction. 

Why? Because it's Eric Clapton's 1964 Gibson SG, called "The Fool."  

I'm reminded not to pay up for stocks at high multiples that are not worth the multiples of "The Fool" unless it's real gem.

Domestic sourcing of production could increase, and "friend-sourcing" should be on the rise under the new administration.

https://x.com/RayDalio/status/1861143344119980145

We have enjoyed a fantastic rally in the homebuilders, but now I'm pairing back homebuilder Toll Brothers, Inc.  (TOL)  and adding Suncor Energy Inc.  (SU)  to my large-cap portfolio. 

Homebuilding could face more challenges after a big run-up while some energy companies appear undervalued. Homebuilders may face economic headwinds due to labor shortages, high material costs, and changing policies affecting home affordability. 

Suncor, could be poised for a technical upside breakout if you look at a multi-year chart below.

Good morning. I’m Louis Llanes. You may have seen some of my recent Saturday columns on TheStreet Pro.

I’ll be sitting in today for Doug Kass on the Daily Diary. I'm an investment manager working in the markets for over 30 years. Today I'll send you what's on my desk and pass on any actionable tidbits. I’m also an avid electric guitarist so if I can’t help myself, I’ll throw in some guitar candy.

Your questions are welcome so please don't be shy. Happy trading today!