Fundamental Objections

Market Sentiment Is Just A Proxy For “Human Action”

The human actor is the necessary ontological condition for market activity, and sentiment functions as the absolute catalyst within that condition that initiates a chain of market events. However, this does not imply it is the singular driver of all subsequent actions or outcomes. An apt analogy for sentiment is that of a spark: the initial spark ignites a flame, serving as the necessary precondition for the fire’s existence. The spark alone does not account for the fire’s propagation; that depends on the continuous draw of oxygen (reflexivity) and the available environmental factors (market structure).

Markets, at their essence, represent deliberate allocations of capital in the present, oriented toward anticipated future gains, amid risk and uncertainty. Since we cannot observe or interact with the future, sentiment is the apparatus through which we perceive information, render judgments, and gain the conviction required for action. When these individual acts of conviction aggregate across participants and settle as price, sentiment ceases to function merely as the medium of investor experience and becomes the substrate: the foundational layer upon which markets, valuations, and risk assessments are constructed. Without it, navigating ambiguity would devolve into paralysis; with it, markets achieve their dynamic equilibrium, underscoring sentiment’s omnipresent, though not omnipotent, influence.

Reducing the nuances of this theory to a simple intermediary for “human action” cannot account for the insights of the Blind Ledger, the existence of parity anchors, or the intersubjective framing of valuation. The claim is not that humans act (no theory disputes this), but that the cognitive tools through which they act are irreducibly subjective at every stage, rendering the search for an observer-independent baseline incongruent with the reality of market activity.

The “Hard Floor” Objection

After a thorough analysis of price, sentiment, and valuation, some critics might assert a “hard floor” of reality. In a liquidation, for example, a company sells its assets, distributes cash to shareholders, and delivers objective (not sentimental) value. While intellectually honest discourse must acknowledge that liquidation produces a realized number, this result is not as absolute as it appears. This fundamentalist objection confuses realized value (the cash received upon liquidation) with objective value (an independent measure of the company’s fundamental worth). Realized value shows that, under certain conditions, in the current market, with the current participants, management, and leverage, “X” was the settlement. However, as with any valuation, adjusting the variables changes the settlement.

In the event of a liquidation, assets are sold to buyers who decide what to pay based on their own expectations. The timing of the liquidation, however, would materially affect realized value; a rushed sale likely yields a lower return than an orderly dissolution. If the “hard floor” can move based on the seller’s fear or the buyer’s opportunism, it cannot be an unbiased constant. Depending on the speed and scope of the sale, the question would not be “did shareholders receive $10 Million?” but rather “was the company worth $10 Million?” A company liquidating for $10 Million today might net $15 Million in a bull market or $6 Million in a bear. The cash received is certainly real, but any claim that it represents absolute “true” value is not.

Finally, it is important to note that a liquidation event is a market verdict that the company deserves no forward multiple and that its future has no value worth pricing. This does not represent an absence of sentiment; the decision to strip away any premium and retreat to asset value is a clear proclamation about what the company is not worth. In this light, the hard floor is the lowest subjective price, not a bedrock for, or a claim to, objectivity.

Mechanical Arbitrage

Although financial markets are governed by mathematical relationships and constraints, we should not mistake these relationships for the cause of action. No-arbitrage bounds¹, such as put-call parity or covered interest parity, are logical requirements for relative pricing; they establish the relationships between two instruments, but do not determine the absolute values of those instruments.² These instruments can tell us the price of a call option given the price of the underlying stock, or the difference in interest rates, but hold no influence or input into why an asset is priced where it is.

Arbitrage devices ensure the market’s instruments are consistent, but the foundation is a product of the belief-formation process. Mechanical logic may constrain price ratios, but sentiment determines absolute values. The same dependencies exist in the broader market architecture through order books, market-making, and execution infrastructure. These provide the channels through which sentiment flows and the mechanism by which it settles, but they do not determine its direction.

Forced Selling Events & Margin Liquidation

Another potential objection concerns forced selling under margin calls or position liquidations where the seller exercises no discretion over timing, price, or volume. Forced selling by itself moves price, which can make it seem like an entirely non-sentiment cause of price formation since positions are mechanically unwound regardless of the holder’s conviction. If price formation requires perception, judgment, and conviction, then a margin call that bypasses all three would appear to constitute a non-sentiment cause of price movement.

However, yet again, we have an objection that mistakes the effect for cause, obfuscating the fact that this activity represents transmission of sentiment-determined bounds. The parameters that trigger liquidations are established by risk managers using subjective models of acceptable loss. The leverage that created the exposure reflects prior conviction about risk and reward; and the counterparty’s decision to extend that leverage was itself a judgment about creditworthiness and collateral adequacy.

Every condition that makes the margin call possible is a product of sentiment-laden decisions made at earlier stages. The mechanical unwinding is the consequence of those decisions, not an independent cause. Forced unwinds are not generating price movement from nothing. A margin call is essentially converting prior sentiment (expressed as leveraged positioning) into forced repositioning when the market’s settlement invalidates the assumptions that supported the original exposure. Once the liquidation is complete, the resulting price becomes the new starting point for (sentiment-driven) reassessment.

Market participants would then evaluate whether the post-liquidation price represents an opportunity (aka: “buy the dip”) or continued risk; the subsequent positioning serves to re-establish an equilibrium. The forced sale may produce a transient price that is not supported by participant conviction, but this transience is precisely why such events are often classified as dislocations in price (a subjective assessment of another kind) rather than discoveries of value. If forced selling revealed objective value, post-liquidation recoveries would not occur, but they routinely do, because active participants reassess and reposition once the mechanical selling pressure abates.

The Impact of Algorithmic Trading

Given that sentiment serves as the foundational driver of market prices, how do we account for the impact of trading algorithms? Algorithms, as rule-bound and human-designed tools, operate based on pre-established guidelines and historical sentiment patterns. These systems may act autonomously in the market; but this autonomy in execution is not the same as independence in action. Even advanced systems that can adapt beyond their initial programming rely on, and operate within, human-defined boundaries and risk parameters. In cases where these systems exhibit emergent behavior, such as when Machine Learning platforms uncover seemingly novel patterns, or execute strategies their designers did not anticipate, the behavior results from the crystallized record of prior sentiment in historical prices. The objective functions these systems optimize learn from the accumulated non-objective inputs of human preferences, and manifest as ciphers of human judgment.

Is it possible for algorithmic or learning systems to discover novel or unanticipated patterns? Yes. But it is impossible for them to discover a pattern that exists outside the price record; as such, Machine Learning still expresses derivative sentiment via its outputs. Earlier in this essay, the discussion of reflexivity illustrated how mechanisms of transmission may differ from the mechanisms of origin. Building on that idea, algorithms and machine learning are best understood as extensions, or echoes, of human sentiment. They enter markets post price formation to detect, analyze, and react to prices established by human judgment, often amplifying existing trends through high-frequency execution. Even when algorithm-induced selling cascades occur, human-designed systems are responding to conditions created by human positioning. While those events may be unintended, they trace back to the objectives, constraints, and assumptions shaped by sentiment at every prior stage.

Passive Flows, Indexing & Mandatory Allocations

How do the conclusions of this essay fare when extended to domains of market activity where sentiment appears absent? With equities, a significant amount of daily trading volume is driven by passive index funds and algorithmic execution strategies (such as VWAP | TWAP) that purchase assets regardless of price. These flows are deterministic, mechanical, and occur at the periphery of price discovery; there is no active assessment of value at the point of execution. From this, a seemingly self-evident rebuttal emerges: there are no perception, judgment, or conviction artifacts driving these specific transactions.

Similarly to the conceptual error highlighted in the section on reflexivity, this is a rebuttal that confuses the transmission mechanism and how these trades execute, with the price formation mechanism and how prices settle. These trades execute and their flows exist downstream of sentiment, at levels determined by the marginal active trader’s perception, judgment, and conviction. Passive index funds and execution algorithms are price takers³ that accept prices that the market has already settled, they do not and cannot set the price of an asset. This reactive price-taker dynamic also applies to institutional participants bound by statutory or regulatory mandates. Whether driven by index construction, regulatory compliance, or contractual obligation, these participants do not set the prices of the assets they are required to hold; prices are set by the marginal active participants, all of whom operate through the intersubjectivity of the market

An informed critic may raise an objection focused on market microstructure, noting that passive inflows can create order imbalances that force market makers to adjust quotes, thereby influencing the “setting” price. This observation ironically works to reinforce, rather than undermine the market-driven, price-taking dynamics of passive flows. What can guide the market-making adjustments to a quote other than perception, judgment, and conviction about the risk of absorbing that flow at a given level? The passive flow creates a condition; the active participant (whether human or algorithmic) then reacts to and prices that condition.

Any imbalance or inelasticity in supply exists precisely because active participants hold divergent views, or program divergent conditions, about where price should settle. What drives this divergence, regardless of its means of execution, is the substance of sentiment. The price impact is a transmission effect, not a price-setting cause, and the differentiation between the two is the same one this essay highlights with reflexivity, forced selling, and algorithmic execution.

Even at the individual level, the decision to invest in a passive index is itself a sentiment-rich act. The investor who allocates capital to an index fund does so under the assumption that the position will appreciate over time, or that the nature of markets makes active management inefficient. This decision is the net result of their conviction and beliefs about uncertain future outcomes; which are open-ended and contingent judgments. Passive flows and indexing do not exist outside of the sentiment substrate of markets, they in fact express a meta-narrative about markets that is no less a product of belief than any active allocation.

In addition, the very classification of these flows as passive directly implies that they are a response to market activity, not an active driver of market activity. Consider that if passive flows represented the totality of market volume there would be no price formation at all, and the index would be frozen at its first (and only) actively-determined level. This would clearly be impossible given that markets continue to clear moment by moment; further evidence that active, sentiment-driven participants set the price, and passive execution vehicles transact at whatever settlement they produce.

Treasuries, Fixed Income & Preferred Equity Products

If we expand this conversation into additional asset classes and we consider an investor purchasing a Treasury Bill they intend to hold to maturity, the nominal return is a mathematical certainty, not a sentiment-driven variable. Similarly, a dividend-paying equity offers a known cash distribution, and preferred shares carry a fixed dividend. In each case mentioned, the payouts from these instruments occur regardless of sentiment, with a defined cash flow anchoring the instrument’s value independent of belief.

In order to properly discuss these instruments, and understand their drivers, we should not ask whether the outcomes in question are deterministic. Rather, we should ask why the investor chose a particular equity or treasury at a certain yield, or over a certain timeframe, as opposed to every other available use of their capital. The reason for this question is simple: while the instruments themselves are deterministic, the decision to enter the trade and lock up finite capital cannot be. The decision itself is the result of inflation expectations, assessment of opportunity costs, and credit risks, all of which are forward-looking judgments. A 5% yield invites a different assessment depending on whether the investor believes inflation will average 3% or 7% over the period.

The implication here is that the realized nominal cash flow in the form of yield is a mathematical derivative of a sentiment-driven allocation. The return is real once realized, but the perceived benefit of that return is entirely a function of expectations resolved through sentiment. More importantly, Treasuries and fixed income instruments demonstrate the Anchor-of-1 thesis in action. The coupon functions as the anchor, a mathematical identity equivalent to natural parity, while the yield at which the market prices the instrument represents sentiment drift from that anchor. With treasuries, those trading at par sit at parity, while treasuries trading at a premium or discount to the nominal dollar value reflect the market’s collective expectations about interest rates, dollar strength or inflation. Bond markets exist because participants disagree about where yields should be, and even though they are designed to return the full face value at maturity, if nominal value certainty removed sentiment from fixed-income pricing, treasury yields would never have premiums or discounts.

For dividend-paying equities, the dividend establishes a known cash flow that functions as the anchor, while the multiple the market applies to that cash flow, expressed as dividend yield or price-to-dividend ratio, measures how far collective belief has drifted from parity. For preferred equity and fixed-income instruments with a stated par value (Strategy preferred instruments such as STRK | STRF | STRD | STRC | STRE come to mind), the anchor is even more explicit: the par value itself is the mathematical identity, equivalent to the natural parity (anchor) of 1. The market price’s distance from par represents sentiment drift in a direct and quantifiable form. A preferred share with a $100 stated amount trading below $80 reflects the market’s collective assessment of creditworthiness, opportunity cost, and forward-looking risk, none of which can be derived from the dividend alone. The dividend is a mathematical certainty; the price at which the market values that dividend relative to par is not. None of these instruments are devoid of sentiment, and through their structure, provide an interpretable anchor from which we can measure market sentiment.

Footnotes

1. Wikipedia: No-Arbitrage Bounds ↩

2. NYU Stern School of Business: Foundations of Finance - Options: Valuation and (No) Arbitrage ↩

3. Investopedia: Price Taker: Definition, Perfect Competition, and Examples ↩