Are sentiment surveys good contrary indicators?
My
recent blog post indicated that all three major surveys of investor
sentiment, from the American Association of
Individual Investors, Investors
Intelligence, and Market Vane, have
been at very high levels, with all three showing bulls at over 50% of
respondents. Periods in which all three were similarly bullish in a given
week has only occurred 86 times (out of 1006 trading weeks). Such periods
included such times of market vulnerability as August, 1987; April, 1998; and
January, 2000.
For this investigation, I decided to focus on the weekly variation in
bullishness during the recent market from 2004 – present (N = 148 trading
weeks). The chart below shows the S&P 500 Index (SPY) charted against
the average weekly bullishness percentage across the three surveys. By
focusing on composite bullishness–readings across surveys–I hope to avoid any
biases that might be present in any single reporting.
What we can see is that, between 2004 and 2006, dips in bullishness below 50%
have represented good buying opportunities. Rises above 60% have tended to
precede short-term price peaks. This latter pattern is particularly
interesting, as it suggests that waning bullish sentiment in a rising market
provides the market with a yellow, cautionary signal.
Nonetheless, the data shows that, for much of this bull market, bullish
sentiment has been quite high, averaging 53%. No other time frame since
1987 has seen such extended bullishness. Indeed, one could say
that–strictly from the vantage point of sentiment–we are in a bubble
market. What does this portend for the bull? Has extended
bullishness correlated with subsequent extended bearish price action?
These will be issues I investigate and report upon in coming days–here and on
the blog.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
His book, Enhancing
Trader Performance, was recently released for publication (Wiley).