 Good day fellow investors. Today we are going to discuss market sentiment. I have always been a fundamental analyst, a fundamental investor so I would like to see value and then invest at a low valuation possibly where the earnings give me my returns. However something that I cannot disregard because it's really a very important driver to stock prices and to the investing environment is market sentiment. And let me start with two quotes from Keynes. So the market can remain irrational longer than you can remain solvent which is very important if you want to short the market that looks overvalued or much heavier statement there is nothing so disastrous as rational investment policy in a irrational world. We can think we are rational but if the world is irrational we have to really adapt to the world or to see how our strategy fits the irrational world. Let's dig deeper into market sentiment and how it affects the stock market. Researchers also back in the 1990s have found that irrational noise traders really distort the market and they can keep those irrational moves as Keynes said very very long in the market so that it doesn't really pay to be an arbitrageur. It doesn't really pay to short the market when it is irrational highly overpriced or to go against the trend when it goes down because those irrational traders are really really powerful and when those who are rational understand that those irrational forces are powerful you are not going to bet against it. So the irrational forces going up or down are becoming then even more powerful and that's very interesting because you have to see the market not as fundamentals but unfortunately as trends. Just an example of how trends work here we can see the hedge fund leverage as stocks prices went up in the last two years more and more hedge funds have been going into equities have been going long into equities by using more and more leverage so hedge funds instead of creating rational market they're really trying to take advantage of the trends so they buy more and more equities. If we look at the short sentiment at the short interest rate as a share of market capitalization as stock prices go higher higher and higher people are short less less and less. So it's very interesting how even hedge funds that are supposed to correct the market from its irrationality they're really trading into the trend when stocks go up they're leveraging to go up and when stocks will go down they will leverage to go down by usually after what happens. So now that stocks are very very high there is more and more buying and there is more and more leverage. If you look at the sentiment index it is very positive now it has been very positive in 2014 2010 2008 and 2007. However after 2007 after 2008 after 2011 stocks have always dropped when the sentiment was positive 2014 stocks didn't drop 2015 they did drop a little bit we have those two corrections and now the sentiment is again very positive and going into the positive whether stocks will drop or not the sentiment that looks at the big index at volatility options says that usually after positive sentiment stocks drop however we never know if that actually will happen. If we look at the SAP 500 we can really see how it works in long-term trends before the 1990s it went up sharp drop from the 1990s till 2000 up sharp drop 2000 2007 up sharp drop and now we have seen 2009 2017 18 really going upwards in a strong strong trend. So if you're a fundamental investor if you look at for example the CAPE ratio you would have probably sold in 1992 1993 where the CAPE ratio was above 20 saying stocks are overvalued and then you wouldn't have even touched the market up till 2008 2009 probably bought before the crash sold in 2010 for a small profit and then missed out on the perfect trend that went up for the next 10 years. So you would have sold in 2009 so you would have sold in 1990 and sold in 2010. If you're a fundamental investor that has some clear rules about when to invest then you wouldn't have done that good and the market would have extremely outperformed you perhaps those who in 1990 invested in bonds that's a different story they would have outperformed the market in the long term but that's something that we can touch on some other videos. Now another thing is okay you see the market is overvalued it just goes up and now I will tell you why nobody is going to short that market because it doesn't pay. It's in the last 40 years 25 years have seen growing stock prices and only five have seen declining stock prices so if you're a hedge an arbitrageur and you say okay I'm bet against the market then you would have been wrong in 25 years and correct only five years that's a very very difficult hedging strategy to sustain or to convince the clients that it will do well. So that's why nobody is hedging now the market and the short interest of the stock market is very very low. What to do? Well if you have taken advantage of the trends now after 8-10 years you really had to start thinking about hedging yourself. So we have to take advantage of the trends and then protect ourselves from the inevitable sharp declines and trends that are going to turn are going to reverse at some point. I have made a video about the seven hedges we will discuss more hedges so please subscribe to the channel. I'm looking forward to your comments look at the hedging video and I'll see you in the next video.