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Sentiment Indicators

Investor Sentiment

The principles of Contrarian Investing hold that when the vast majority of people agree on anything, they are generally wrong. Otherwise no market would function because there is simply no minority with money enough to make a majority rich. A true contrarian, therefore, will first try to determine what the majority are doing and then will act in the opposite direction. Market Vane, AAII and Investors Intelligence are all contrary opinion indicators.

A unique feature of Market Vane's Bullish Consensus numbers is a weighting formula applied to the various market letters. More weight is given to letters with a larger following and less weight to those with fewer readers. Each week a poll of market letters is taken to determine the degree of bullishness or bearishness among futures professionals. The theory is that when a significant number of participants are bullish, they are already positioned on the long side and there is little potential buying power left. If most participants are bearish, selling pressure has reached an extreme and prices will reverse to the upside.

Thanks to the Internet, the American Association of Individual Investors (AAII) now polls its 170,000 members daily. Respondents indicate how they feel about the market's performance in the next six months. The chart below shows the number of bulls divided by the number of bears. A 10-week moving average is applied to smooth out the swings. High readings appear near market tops and low readings near bottoms.

Since 1963, Investors Intelligence has been compiling data on the opinions of publishers of market letters. They conduct a weekly poll of about 130 market newsletter writers and calculate the percentage who are bullish, bearish or expecting a short-term correction. The resulting index shows that the advisory services follow the trend of equity prices by becoming most bullish near market tops and most bearish around market bottoms.