Trader’s Narrative

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:

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:

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.

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.

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.