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Buy On Dips Confidence Index at Trader’s Narrative

Buy On Dips Confidence Index

I’m always on the lookout for new, interesting and little followed ways of measuring sentiment. Here’s a survey conducted by Yale (Prof. Robert J. Shiller) to measure how much confidence retail and insitutional investors have in the market being able to “bounce” higher after a decline of 3% (or more). The data goes back many years but it was just recently that it was measured monthly:

buy on dip confidence index Feb 20091
Source: Yale Center for Finance

Here is the exact survey question that is asked:

If the Dow dropped 3% tomorrow, I would guess that the day after tomorrow the Dow would:

1. Increase. Give percent:___________
2. Decrease. Give percent:___________
3. Stay the same.
4. No opinion.

The Buy-On-Dips Confidence Index is the number of respondents who choose 1 (increase) as a percent of those who chose 1, 2 or 3. This question was never changed over the twelve years.

The latest data point is from February 2009, which shows that investors are as confident as they were in early 2006. The lowest institutional “confidence” data point (in recent history) corresponds to January 2005 (50.72) and May 2007 (48.68) not, as you might expect, around the time of the last bear market in late 2002 or early 2003.

Off hand, having a +70% confidence in buying dips doesn’t really get my contrarian mojo going. But then again, it doesn’t seem that this survey has any real meaningful insight to offer. Here’s another way of looking at the data. The chart below includes all the monthly data available with the S&P 500 Index (SPX) superimposed for easy comparison:

buy on dip confidence index comparison SPX

When I first learned about this survey, I had high hopes but with about 100 monthly data points, it looks like it is relegated to the useless sentiment indicators pile, along with the Citigroup Panic/Euphoria Model and Ticker Sense’s Blogger Sentiment poll.

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2 Responses to “Buy On Dips Confidence Index”  

  1. 1 Wes

    Babak, Since you’re still looking at sentiment indicators, I thought I’d bring you up to date on Hayes’ version of the Rydex ratio

    Do you think they may have nailed the bottom ? This is easily the BEST sentiment indicator I follow, and I think it’s because it’s based on what the crowd is actually doing with their money, rather than what they “think”.

    Best, Wes

  2. 2 Babak

    Wes, it is a good one, although due to the recent popularity of ETFs and especially leveraged ETFs, the fast, market timing money has been leaving Rydex so that throws a shadow of doubt over the indicator or at least the reliance on it as before. I prefer to look at the weight of indicators rather than any one particular one per se.

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