Market Indicators - Investor Sentiment

Top 924. May 6, 2004 7:22 PM

» Normxxx - Sentiment Indicates Market Downtrend

From A Usually Reliable Source. . .

Sentiment Readings Indicate US Market Downtrend
But Bull Markets Can Still Be Found If You Know Where to Look

Investor sentiment is an important aspect of stock trading, research, and analysis. And although the data is widely cited, it is often misunderstood and easily misinterpreted. The key to properly utilizing sentiment data is to completely understand how to read the data and what it means.

March 2003
Market recovery sentiment

Occuring Now 5.0%
1-3 months 8.9%
3-6 months 19.4%
6-12 months 31.7%
12+ months 35.0%

Each month since January 2002, our firm has conducted a survey of individual investors to find out when they believed a market recovery was likely to occur. Between January and March of 2003, the majority of investors surveyed believed a market recovery was 12 months off. As you can see in the table above, this data reached its (low) extreme in March of 2003 just prior to the bull market initial lift off. And, as many of you now know, from March of 2003 until the end of the year the Dow returned a strong 33%, while the Nasdaq soared 52%.

January 2004
Market recovery sentiment

Occuring Now 71.5%
1-3 months 4.4%
3-6 months 6.5%
6-12 months 5.1%
12+ months 12.4%

But in January of 2004, investors had come full circle, and a large majority of them (over 70% compared to 5% in March of 2003), felt that the market was 'now' recovering. Once again, they were wrong. Since January the Dow has lost 1.5%, while the Nasdaq is down 4%. And as you can see by the current May data readings below, we're now about right down the middle in terms of market recovery sentiment, but the trend indicates stocks should move lower, before any significant move higher can be sustained.

May 2004
Market recovery sentiment

Occuring Now 36.8%
1-3 months 9.9%
3-6 months 17.0%
6-12 months 16.2%
12+ months 19.9%

An investor could look at this data and make the assumption that it was wrong and therefore meaningless. There is one problem with that assumption. Remember the key to properly using sentiment data? One needs to know that this particular sentiment reading 'type' is considered 'contrarian'. And contrarian readings count on the data sample (in this case individual investors) to be wrong (or behind the curve). Knowing this allows you to interpret the data 'on the contrary', or 'opposite' basis. In other words, don't follow the crowd.

Many investors understand that these contrarian indicators are great for overall market predictions, but then go on to ask if they can be used for specific stocks. The answer is yes. Combining market, sector, and global region readings, sentiment data can be relied on for specific (and quite accurate) stock or index recommendations. And if properly positioned, data can be collected on the outlook for individual stocks.

In July 2003, we asked investors to pick their five favorite and least favorite Dow stocks. The portfolio of the 5 most favored Dow stocks returned just over 3%, while the portfolio of the 5 least favored Dow stocks returned a whopping 22%. The least favorite portfolio of stocks beat the returns of both the S&P 500 (which was 16%) and the Dow (which was 18%) in the comparable timeframe. Most amazing was General Motors (GM), the least least favorite stock. It turned out to be the best performing stock of the whole group, gaining 18 points (or 50%) between July '03 and January '04.

The same survey was conducted for the first half of 2003 (January thru July) and returned similar statistics. The least favored stocks returned 30%, surpassing both the Dow and the S&P 500 in the comparative timeframe, while the most favored stocks returned only 10%.

The most recent least favorite picks (from a survey conducted in January of this year) include Boeing and Eastman Kodak. Intel was the most favorite pick, and so far the contrarian reading has held its own with Boeing up, Eastman flat, and Intel showing close to a 20% loss to date. We'll have to wait and see if the down trending market means our least favorites will not necessarily be the 'highest movers', but instead the 'least affected' by poor market conditions.

Aside from understanding the 'type' of sentiment reading, it's also a good practice to gain an historical perspective of the data. Obviously data that can predict is better than data that reacts to market conditions. Make sure the sentiment data you're paying attention to actually offers insight to market or equity moves.

-- posted by Normxxx

Top 925. May 14, 2004 7:51 PM

» Jas_Jain - Re: A Market Bound by Fear

In response to message posted by Kirk:

-----
"A Market Bound by Fear -- . Bulls at 44.6% down from 46.4% Bears at 25.7% up from 23.7%"

One has to be blind to reality to think that bulls at 44.6% and bears at 25.7% represents a market bound by fear.

Scam Lovers will have to explain one day when bulls are at 5% and bears are at 85%. I wonder what would they call that -- A market bound by extreme morossnes?

Scam Lovers ain't seen nothin yet.

Jas

-- posted by Jas_Jain

Top 926. May 21, 2004 6:19 PM

» beartamer - Investors Intelligence

Can anyone provide Investors Intelligence data for May 19? Thanks

-- posted by beartamer

Top 927. May 21, 2004 6:44 PM

» doc008 - Re: Investors Intelligence

In response to message posted by beartamer:

Investors Intelligence is at 43.6% bullish and 26.7% bearish.

-- posted by doc008

Top 928. May 21, 2004 9:36 PM

» F111Star - Re: Re: A Market Bound by Fear

In response to message posted by Jas_Jain:

5/85 would be a major buying opportunity, no?

-- posted by F111Star

Top 929. Jun 4, 2004 8:43 AM

» Normxxx - Sideways thru the Summer...

From A Usually Reliable Source. . .
3 June 2004

Trend-Followers Beware

Bottom Line: We are seeing a very high number of uncertain responses to some of the sentiment surveys. History suggests that the market is more likely to oscillate back and forth than trend strongly after such periods.

Feeling unsure about where the market’s going? You’re certainly not alone. In April, I discussed readings from the lowrisk.com and Investor’s Intelligence sentiment surveys that showed a very high number of neutral responses. The case can be made that once again, we are seeing an unusually high level of uncertainty.

The American Association of Individual Investors (AAII) came out with their most recent survey results today showing 33% bulls (down from 36% last week) and 27% bears (down from 40% last week). The rest of the respondents didn’t have an opinion one way or the other, and at 40% of the total this contingent of fence-sitters was the highest in over a year. Looking at the Investor’s Intelligence survey, it too continues to show an unusually high number of uncertain responses. Over the past twelve weeks, an average of close to 30% of the population was neutral – the greatest amount since 1992. Technically, “neutral” according to I.I. isn’t really neutral, it is bullish but expecting a short-term pullback. But to me, someone who says they are bullish, but expects prices to decline, is neutral.

Back in April, I noted that my feeling was that an extraordinarily high number of neutral respondents would lead to a choppy market over the next several months, one that had difficulty sustaining a meaningful trend. If true, it could have a profound influence of what types of strategies are most effective for traders – one that tries to capture trends (like breakout strategies) or one that tries to play a range-bound market (like overbought/oversold indicators). Today I went back and looked at the entire history of the I.I. survey, and the results do support the likelihood that a range-bound market is ahead of us.

To test this, what I looked at was the 12-week moving average of neutral responses in the survey from 1969 through the present. I then sorted the readings from highest to lowest and looked at the top and bottom 5%. This narrows down the survey readings to those times when we saw the most uncertainty (in terms of many neutral responses) and those times we saw the least uncertainty. Note that those times with the least uncertainty are not necessarily those times the respondents were most bullish – it could be they were very bullish or very bearish, but they were expressing a strong opinion one way or the other.

Next, I looked at how the S&P performed over the ensuing six months. I wasn’t necessarily interested in whether it tended to go up or down, I just wanted to see how much it moved. To see, I looked at the maximum gain the S&P enjoyed over the next six months, and also the maximum loss it suffered. Looking at the difference between the two gives us an idea of how volatile the index was over the next six months. The table below shows these results.

	Lots of Strong Opinions	Lots of Fence-Sitters	Random
Average	19%	11%	15%
Max	39%	22%	41%
Min	9%	5%	4%
St. Dev.	7%	5%	7%

We can see that the average volatility after periods when respondents had strong opinions was 19%. This means that the difference between the maximum price over the next six months and the lowest price was 19%. We saw as much as a 39% difference, but nothing lower than 9%. The standard deviation was 7%.

After periods, like now, when the number of neutral responses was very high (i.e. lots of fence-sitters), the average difference between maximum gain and maximum loss dropped to only 11%. The largest was 22% and the smallest was 5%. These results are significantly different from the other periods – in fact, they were nearly ½ as volatile as the opposite extreme.

These results suggest that the tug-of-war between those who are trying to form an opinion will most likely lead to something of a choppy market that is prone to reversals, and not one that is likely to see a strong breakout to the upside or downside. Just as enough of a trend is formed to bring a majority of players on board, it will reverse. I believe in these times that using overbought/oversold types of gauges, such as our sentiment measures, or common technical indicators such as stochastics, will prove more effective than trying to chase nascent trends.

Conclusion

Last time, I noted the excessive enthusiasm we were seeing from bullish Rydex traders, and how it was symptomatic of a renewed sense that our troubles were behind us, a scant two weeks after a veritable cornucopia of concerns. That lead me to believe that significant upside progress in the short-term was unlikely, so the action we’ve seen since then seems appropriate.

The choppiness this week has served to wear off some of the extreme overbought readings we saw in our short-term measures entering the week, and now some of the longer-term ones are wearing off their respective overbought readings. Tomorrow’s jobs report is once again garnering the attention of nearly everyone. Looking back on my notes, the report seems to have taken on extra importance beginning in February of this year (at least according to what traders were saying), and each of the reports since then has indeed triggered outsized moves. Our short-term measures are pretty much neutral across the board, and I would not fight the initial trend from the report. The market has tended to maintain a short-term trend in the days after recent reports, and I don’t see anything in our measures that would suggest that fighting the short-term move is a good idea.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only.

-- posted by Normxxx

Top 930. Jun 6, 2004 9:00 PM

» MarketVVizard - Credit Counselor goes bankrupt

Credit counseling company AmeriDebt files for bankruptcy

By FOSTER KLUG

The Associated Press

6/5/04 7:05 PM

BALTIMORE (AP) -- A credit counseling company accused of using
deceptive marketing to rip off hundreds of customers filed for
bankruptcy protection Saturday.

AmeriDebt spokeswoman Christine Kraly said the Chapter 11 filing
"will in no way impede" the company's operations. Payments made
by its customers are processed through a separate trust account
that will not be affected, the company said.

"AmeriDebt's first priority is and always has been serving its
consumer clients," the company said in a statement.

In November, AmeriDebt became the first credit counseling
company to have a federal lawsuit filed against it. Minnesota,
Illinois and Missouri are among five states that have sued the
company.

"We have pursued companies in the past that have gone the
bankruptcy route and recovered money for consumers, so we're going
to hang in there as long as it takes," said Scott Holste, a
spokesman for the Missouri attorney general's office.

The Federal Trade Commission alleged the company hid fees and
did not educate people about how to get out of debt. Regulators
said AmeriDebt made customers think that an initial fee would be
part of their debt-reduction payments to creditors. Instead, it
went to the company.

AmeriDebt has disputed the characterization, saying it provides
educational services to customers. It says the payments cited by
the FTC are "voluntary contributions."

Federal regulators also accused AmeriDebt of marketing itself as
nonprofit, but actually works to make money for affiliated
for-profit companies. The agency also said the company's radio and
television ads said AmeriDebt helps customers learn better
financial management skills.

AmeriDebt laid off most of its workers in October and stopped
seeking new customers in November because of what it called
"negative publicity" and to focus on serving its existing
clients. The company also stopped all advertising.

AmeriDebt said it has worked with 400,000 people and had more
than 90,000 current clients as of July.

-- posted by MarketVVizard

Top 931. Jun 7, 2004 7:29 PM

» Normxxx - An Interesting Indicator and Analog

An Interesting Indicator and Analog

The chart below compares the Month-end Dow Jones Industrial Average closing prices with the University of Michigan's Consumer Sentiment Index monthly reading. What we find here is that there is a very high correlation between these two indices. What is particularly interesting is that sometimes the two move contemporaneously, while at other times one index leads the other. It is a gift when the University of Michigan Index moves out ahead of the DJIA, giving us - in effect- an early warning of coming stock market moves. This was the case in 2001 when the Sentiment Index got out 3 to 4 months ahead of the Dow Industrials. It correctly forecast a crash. We were not so lucky in 2002 when the two moved simultaneously.

We now seem to be experiencing one of those wonderful times again where the University of Michigan Consumer Sentiment Index is out ahead of the Dow Industrials, by about two to three months. This time it is predicting a decline. In examining this chart, what is unique about these two indices is I don't see any false breakouts-- not one instance when the Sentiment Index fell and the DJIA did not (or conversely). Same on the upside. They eventually catch each other, like mating Canadian geese flying across the skies.

The above chart takes a look at the first seven years of the past two secular bear markets, 1929 through 1936 and 1968 through 1975, and compares the current (2000 through 2004 so far) Bear Market's price action with a 'canonical' average of the past two. The correlation is pretty strong, at times almost tick for tick. The timing of ups and downs is very close, only the extent of moves differing a bit. But for the most part, when the canonical bear's prices fell, the current bear's prices fell, and similarly on the upside.

Analogs are a lot of fun to consider, but sooner or later they all break apart.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

Top 932. Jun 8, 2004 3:17 PM

» Normxxx - A Horse of a Different Color

A Horse of a Different Color

by Guy Lerner | June 08, 2004

This past Saturday I was watching Smarty Jones go for the Triple Crown. The pre-race favorite, Smarty was a shoe in to win it all. Never before had so many bet so much on one horse, and when the race was over, never before had so many been so wrong! So much for America's horse!

The conventional wisdom on Smarty Jones was that he could not lose. I know nothing about horse racing (even though I live in thoroughbred country), but the contrarian in me wondered if it was possible that everybody was leaning the wrong way. I wasn't trying to be contrary for contrary sake, but I did realize that maybe the odds on the other horses were higher than they normally would have been since everyone thought that Smarty Jones was a sure winner. Thus I reasoned why bother going to the window to bet on Smarty Jones just to win 20 cents on the dollar when the other horses presented themselves with more attractive odds.

So what does all this have to do with the stock market? For me the similarities were clear. In the stock market as is often the case, we often see that when the crowd is extreme in its belief, the crowd is wrong. This is the time to be contrarian. The question for racing fans and for stock speculators is: how do you know when the crowd will be wrong?

I don't think you ever really know and we can safely say, "there is no such thing as a sure thing." But, I think you can identify emotional extremes when the "majority" of stock market participants are leaning the wrong way. That is, you can quantify when it might be best to be contrary to the prevailing whims of the herd.

But before we take that "sentimental" journey, a word or two about the fundamental back drop to this stock market. Fundamental schmundamentals- sometimes they don't mean a thing. Rates are going up (usually bad for stocks), but the Fed is going to move slowly and plus all this is factored in anyway. See what I mean? At times it is not the fundamentals but the psychology of the whole darn thing that seems to drive prices higher or lower.

So today's discussion will focus on that time when everyone is betting on Smarty; remember we cannot predict the outcome but we can only identify a time when everyone is unanimous in their beliefs thus putting the odds in our favor for substantial gains if a reversal were to occur.

Figure #1 is a weekly chart of the NASDAQ 100 (see next page). The indicator in the lower panel is a composite of several sentiment surveys that are looking at the opinions on the stock market of 4 different market participants. The studies under consideration are the Investors Intelligence (polling newsletter writers), American Association of Individual Investors (polling individual investors), Market Vane Bulls (polling investment advisors) and Put- Call ratio (quantifying behavior of option players). While there is nothing new regarding my use of this data, my methodology of how I look at the data requires a bit of an explanation. First all the data is smoothed over a 4 week period and each 4 week moving average is wrapped in adaptive bands that look for extremes in the indicator relative to values over the past year. Using the adaptive bands is useful in that most people would agree that there are no absolute extremes from era to era. Extremes are relative and using adaptive bands helps identify extremes based upon the past activity of the indicator and not on some pre-determined level. Each indicator is then given a score based upon its proximity to the upper and lower bands. The composite indicator then is the average of all four indicators.

Ok got it?

Returning to figure #1 we can see that our composite sentiment indicator is now registering a score of zero. The interpretation is that our 4 different sets of market participants are extremely bearish on the market. The ovals on the chart highlight other "bearish" times.

Figure #1/ NASDAQ 100/ Sentiment Indicator (weekly)

<img Width="520" src="http://www.safehaven.com/images/lerner/1...">
http://www.safehaven.com/images/lerner/1...

So now that we know what the playing field is like how can we turn this into a profitable system? For entries, the composite indicator had to be less than 0.2 and the entry was an upward break of a down sloping trend line; the exit strategy was a downward break of an up sloping trend line. (The entries and exits were programmed via the computer using my proprietary Price Structure Analysis.) The results are shown in Table #1.

Table #1 "BUY WHEN HERD IS BEARISH"

Parameter Value

Profit Factor 8.11
Select Profit Factor 8.11
% profitable 92%
# of trades 14
Average win :: lost .6
Stop Loss 12%
Trading Period 17.2 years
Time in Market 37%
Days in winning trade 125 days
Days in losing trade 95 days
Buy and Hold Return 715%
Rate of Return 710%
Annual Rate of Return 39%
RINA Index 164

This simple but effective trading system illustrates the 2 points we have heard many times: 1) buy low; and 2) "buy them when nobody wants them." The system has several flaws including only 14 trades in 17 years and a large 12% stop loss; it should be noted that 11 of the 14 trades had a draw down of less than 7% from the point of entry. Good things about this system are its high win rate and the fact that the select profit factor and profit factor are equal meaning that the system's gains are not due to unusually large winners. Also, the annual rate of return was 39% per annum.

So does it always pay to be Mr. Contrary? After all, we all have heard that "the trend is your friend" and "don't fight the trend." For the most part, I think it is easier to make money going with the trend, which means going with the herd, but there are times when you need to break with the crowd and go your own way. And now I believe is a time to break with the crowd.

That is The Technical Take!

The Technical Take

$ bearish sentiment presents opportune time

$ long QQQ and SPY

Thanks for reading and I hope you have found my analysis informative, insightful and profitable....

-- posted by Normxxx