What to make of trader sentiment

By the numbers: According to the new Charles Schwab Active Trader Pulse survey, the COVID-19 pandemic is the leading risk among traders, with respondents identifying it as having the biggest impact on their investment strategy for the remainder of the year.

• This risk ranked just ahead of inflation and Federal Reserve policy.

According to Bank of America’s August Global Fund Manager survey published last Tuesday, inflation and a Fed-triggered "taper tantrum" are leading risks, but the spread of the Delta variant is rising rapidly on the list.

What they’re saying: "Sentiment is among the most influential factors over the short- to medium-term (weeks to months) as emotion swings with headlines, economic reports, and the latest corporate news," Jason Goepfert, chief research officer at SentimenTrader, tells Axios.

• In other words, even as the long-term fundamentals of a stock or the stock market may be intact, news headlines that amplify traders’ concerns can cause prices to drop.

Yes, but: Dave Lutz, managing director at JonesTrading, tells Axios that while he agrees sentiment is a key driver of market volatility, that volatility may be limited when the particular concern is already well-known.

• "The biggest factor – in my opinion – is the 'unknowns,'" he says. "If a bad event is seen coming down the pike (like the taper), the market can digest it no problem. It’s when there are 'unknown' outcomes or events that really cause the ripple."

Between the lines: Michael Antonelli, market strategist at Baird, cautions that measuring sentiment accurately isn't as simple tallying the results of a survey.

• "The issue is that there’s no real way to measure sentiment because it’s always changing as price changes," he tells Axios. "Trying to use it as a market-timing tool is incredibly difficult because it usually only works at extremes."

The big picture: It’s interesting knowing what market participants are worried about. But that information doesn’t necessarily make the market any more predictable in a way that most traders and investors can exploit.

• "I always feel ‘slow and steady wins the race,'" Lutz says. "Yeah, some cats are exceptional market timers and can play quick trends, but the average investor shouldn’t shift every time the short-term winds move in a different direction."