Last week the American Association of Independent Investors (AAII) latest poll showed that 57.1% of those polled held bearish market expectations, while only 20.9% were bullish. This was newsworthy because of the lopsidedness of the expectations. The contrarian view is that bear markets are a great time to buy and vice versa. But one survey of one subsector of investors should not be sufficient evidence to start making purchases. http://www.aaii.com/sentimentsurvey
Fortunately Barron’s online shows the AAII poll in conjunction with three other (Consensus, Market Vane and First Coverage) investor sentiment metrics as well as Citigroup’s Panic/Euphoria chart, giving a broader context to any extreme readings. A future Examiner article will dissect the pros, cons, and methodologies used with these readings. . http://online.barrons.com/public/page/9_0210-investorsentimentreadings.html
The Chartered Financial Analyst curriculum recommends other technical indicators to better determine whether the sentiment in the market is truly bullish or bearish.
The first is how much money mutual fund managers are keeping in cash. A rule of thumb for contrarians is that if it is less than 5% mutual fund managers are greedy and you should sell. More than 13% means the opposite, namely a good time to buy. The Investment Company Institute (ICI) publishes this useful indicator online. http://www.ici.org/research/stats/trends/trends_05_10
Another piece of evidence to use is Investors Intelligence Advisory Sentiment Report. While other firms, including Rydex and Investors’ Business Daily, now conduct similar surveys, the original subscription-only venerable indicator remains the most accurate. Because investment advisors are generally trend followers, if 60% or more are bearish and 20% bullish it could indicate the bottom of a market and vice versa. It should roughly corroborate the AAII data and has been on of the best predictors of market bottoms historically. http://www.investorsintelligence.com/x/us_advisors_sentiment.html
Yet more good stock market gauges can be found in the derivatives data. Both options and futures can display trends. If the Chicago Board Options Exchange (CBOE) has a put call ratio above .6 (more than 6 puts for every ten calls) the contrarian should buy. Similar action should be followed if more than 70% of futures positions are long. Barron’s keeps this data readily available in its handy ‘Market Lab’ section but it can be found at its respective sources (CBOE and CFTC) as well. Again this is all provided that one believes in the first place that predictions of a downturn are made when positions are already sold out (indicating nowhere for a market to go but up) and vice versa. http://online.barrons.com/public/page/9_0210-cboemktrt.html http://online.barrons.com/public/page/9_0210-traderscommitments.html