Trader’s Narrative

A reader asked that I revisit my dismissal of Ticker Sense’s blogger sentiment poll so here’s a chart to see if we can once and for all decide if this has any value to analysis of stock market sentiment.

The Ticker Sense Blogger Sentiment poll started on July 10th 2006. But it was a while until it registered any extreme readings. My definition of “extreme” would be a bull/bear ratio of 0.60 and under or 1.71+ (I ignored neutral readings). To make it easier to visualize, I’ve only included these extremes - red and green dots respectively:

For an example of extreme optimism: recently, on October 13th, 2008 there were 75% bulls, zero bears and 25% neutral. While a good example of pessimism was on March 12th, 2007 with only 13.16% bulls, 42.11% bears and 44.74% neutral.

The first thing you notice is just how erratic this sentiment measure is. Although bloggers are asked: “What is your outlook on the U.S. stock market for the next 30 days?” they seem to be ready to change their minds from one extreme to the next at the drop of a hat.

Another characteristic is that while they put in a continuous string of bearish extremes in late 2006 and into mid 2007, they often jump from one extreme to the other and back.
Continue reading ‘Ticker Sense Blogger Sentiment: Indepth Analysis’

Ticker Sense’s blogger sentiment poll is one of the lesser known sentiment measures so you’re forgiven if you aren’t familiar with it. The most recent survey results, from October 13th, show that there are no bears. Zero. None. Zilch. Three quarters are bullish while the rest are neutral or can’t make up their minds.

According to contrarian analysis, this might be a negative sign. Or maybe it is a bullish sign. After all, shouldn’t these people be “experts”? If they parse the market on a daily basis, invest and trade regularly, shouldn’t they have a better idea than the average person out there?

So does the runaway bullishness in this week’s sentiment survey mean that we should sell? or buy?

Neither.

I looked at it as a sentiment metric last year and found that as it turns out the Ticker Sense blogger sentiment survey offers no edge at all:

The conclusion I draw is that the poll is simply meaningless. It provides no significant piece of sentiment information we can use. At times it is bullish and at most other times bearish. But there is no connection whatsoever with the market.

This latest data point is the highest bullishness but I don’t think it really makes any difference. According to its past, the survey can not be used as either a contrarian measure nor as a straight indicator of any kind. Honestly, I’m really surprised that the folks at Ticker Sense are continuing this survey.

As you were.

Sentiment surveys are a great way to measure what the masses are feeling. Are they scared? panicky? greedy? apathetic? There quite a few sentiment measures out there. They each try to measure some sort of sentiment: from investment newsletter writers to Mom and Pop retail investors, to institutional strategists and now, thanks to Birinyi Associates we even have a blogger sentiment survey.

To be useful, a survey has to provide an edge. That is to say, it has to be able to give some reasonable signal related to the market. Usually sentiment surveys are interpreted from a contrarian point of view. This inverts the results so that when the survey shows an extreme bearishness, it is interpreted to mean that it is a good time to buy.

But there is no reason why a sentiment measure has to be contrarian. It can also be accurate. That is bullish when it should be bullish and bearish when the market it topping. The worst sin a sentiment survey can commit is to have no edge.

And I’m afraid the Ticker Sense blogger sentiment poll is guilty of this. We have data for almost a full year now and no matter how we slice and dice it, it provides no edge whatsoever.

It’s most obvious characteristic is that while the market has been relentlessly going up, week after week, the poll shows a consistent preponderance of bears over bulls.

But before you think that this means that we can use it as a contrarian measure, consider the other side of the coin. The rare time that the poll has shown more bulls than bears - only 5 times! or around 10% of the time - it has not been a reliable indicator of a topping market.

Out of the five times the poll has seen more bulls, three of those have in fact been good buying opportunities (see graph below). I suspect they were times when the bloggers grudgingly gave in to a powerful bull market - albeit for a very very brief period of time.

Below you can see a chart showing this (green dots are instances of more bulls than bears). I didn’t put a red X on the chart everytime a bearish consensus proved to be false because that would make the chart as red as a butcher shop:

The conclusion I draw is that the poll is simply meaningless. It provides no significant piece of sentiment information we can use. At times it is bullish and at most other times bearish. But there is no connection whatsoever with the market.

This reminds of last year’s experiment by Barron’s with a proprietary sentiment concoction from the hallowed halls of Citibank. For week after week this sentiment measure treaded water at a level they had marked ‘panic’. The market went up, the market went down. And still Citi’s sentiment measure mumbled ‘panic’. After a few months of fielding complaints from readers Barron’s withdrew the metric.

That’s what I suspect will happen with Ticker Sense’s sentiment poll also. The market is ruthless. If something has no value, it is discarded.

Here’s something you don’t see every day! The Ticker Sense Blogger sentiment poll is actually bullish. You know what that means, right? Run for cover! Hide the women, children and your portfolio!!

I’m just having a bit of fun with them. It’s just that constituents of the Ticker Sense Blogger sentiment poll - on average - are a cautious bunch (polite term for permabears). So we very rarely see the bulls outnumber the bears in that poll. In fact, since starting in July 2006, this has only happened 4 times. Which means that for more than 90% of the time, this measure shows varying degrees of bearishness.

Here’s a chart showing the four times that bulls have outnumbered the bears in the Ticker Sense blogger sentiment poll (green dots):

The first two times when the bulls peeked from under the covers were quite good calls. The market went on to continued gains. The February bullishness though should have been taken as a contrarian signal. And what about this most recent bullishness?

Well, you can’t take any indicator or sentiment measure in a vacuum. But I do see a few clouds forming on the technical horizon. Nothing too worrying, but it does seem that the bounce from the March bottom has run its course and we may see some contraction as the indices rest to digest their move up.

In mid March I considered the question whether the dip would be followed by a bounce or a significant intermediate bottom (I had no qualms that it was an inflection point):

My conclusion after all this is that we are probably seeing a short lived bounce here. We need more capitulation to launch another leg up. So be careful out there.

The bounce has completed as the indices have returned to their prior swing highs. But now the cumulative tick (or its approximation via a short term average of the TICK) as well as the percentage above moving averages are signalling caution. So as much as I’d hate to disagree with Ticker Sense’s consensus of trading blogger’s bullishness, I don’t think it is prudent to press the long side here and now.

The time to go long was in early to mid March.