Welcome to my blog! My favorite sentiment indicators are very near levels that signal important turning points in the market. Therefore, now seems to be the right time to kick off a blog here on iBC.
Since the second week of May, the AAII Bullish % has stubbornly stayed above the 35% level and the Bull:Bear ratio has stayed >1.0. Bullish % levels below 35% and Bull:Bear ratios <1.0 in tandem are hallmarks of important bottoms. The Bullish % and Bull:Bear ratio in the reports the weeks of 5/9, 5/16, 5/23 and 5/30 have been 38.7% and 1.90, 39.4% and 1.77, 38.3% and1.44, and 39.3% and 1.60, respectively. I am hopeful that Friday’s flush was the tipping point that will get the AAII Bullish % below that 35% level and the Bull:Bear ratio <1.0.
I am also hopeful that the reading on the NAAIM Sentiment Survey we get this week coming up will be in the single digits or even negative (ie, the average professional is short equities). The times we have seen three consecutive readings below +10% on the NAAIM Sentiment Survey have always coincided with very low AAII Bullish %’s and AAII Bull:Bear ratios <1.0 and have marked important bottoms.
There have been three occasions where the NAAIM Sentiment Survey has been below +10% for three consecutive weeks. The three occasions have been December 2008, March 2009 and October 2011. A strategy of using the second consecutive week the NAAIM Sentiment Survey has been below +10% as a buy signal for long $RUT positions has yielded very good short-term results. The December 2008 signal saw $RUT peak 10.1% above the second week ending level four weeks later. The March 2009 signal saw $RUT peak 37.9% above the second week ending level eight weeks later. The October 2011 signal saw $RUT peak 10.9% above the second week ending level six weeks later. That’s an average return of 19.6% an average of six weeks after the signal.
And, in case you were wondering, the AAII Bullish % and Bull:Bear ratios when the NAAIM buy signals were received were; 23.1% and 0.47, 26.4% and 0.56, and 34.4% and 0.76.
I would think the economists who are surveyed to develop the consensus forecasts for the US economic reports will be lowering their estimates. Likely to the point where we can start to get some upside surprises in the economic data relative to consensus. At least, I hope so.
If we get an ugly open on Monday I will take that as an opportunity to sell the TZA I had bought to hedge my purchases of AGQ, TNA and UCO. I was early in my purchases of AGQ, TNA and UCO as I was buying in anticipation of fear showing up. It’s taken longer than I thought it would but I think next week’s AAII and NAAIM reports will show we are finally starting to see real fear in the market. So I’m going to stay greedy.
5 Responses to First Post
Question: do these sentiment measures typically bottom prior to the market?
Meaning, does a divergence form where the market tests old lows or makes new lows while the sentiment measures do not?
No, these sentiment measures are concurrent with the market. They neither lead nor lag.
They are contrarian in nature and do sometimes form divergences that can be used as signals in addition to the levels themselves. For example, from the first week of October 2008 until the third week of December 2008 the AAII Bullish % spent twelve consecutive weeks below the 35% level. Bullish % reached a low of 22.2% and the Bull:Bear ratio reached a low of 0.41 during this twelve week stretch. While the indices in March 2009 reached a lower low compared to late 2008, the AAII Bullish % and the Bull:Bear ratio did not. In March 2009 the Bullish % reached a low of 26.4% and the Bull:Bear ratio reached a low of 0.56. A positive divergence was formed as each measure was higher than the levels reached in the waning months of 2008.
Hope this helps.
I appreciate the significance of the sentiment surveys, but would it not be better to concentrate on various breadth indicators, which will indicate what the collective market participants are *doing* vs what they are *saying they are going to do* ?
Absolutely, Ricky. Sentiment indicators are only one of the tools that I use to get a read on the market to identify opportunities. The AAII and NAAIM happen to be my two favorite sentiment indicators. As point of clarification, the NAAIM Survey tells us where the money managers who participate have positioned their portfolios on the long-short spectrum, not where they are going to position.
I like to use breadth, momentum and sentiment indicators in tandem. Each has their positives and negatives. For example, the NYSE ARMS index has an average value of 1.22 with a std. deviation of 0.6 going back to 1995. Going back to May 4th of this year, the NYSE ARMS index has spent 20 consecutive trading sessions below the mean value. The NYSE ARMS index value appears to have bottomed on May 17th when the S&P closed at 1,304. Unfortunately for the bulls, the S&P has continued lower while the ARMS index has been moving upward. In the spirit of glass is half-full, the recovery in the NYSE ARMS index has set up a positive divergence indicating that the selling appears to be exhausting itself.
Regardless of what indicators one likes to use, I find it best to think of the indicators I use as a weather vane rather than a gps device.
I recently link some really good articles on the net.