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The institutional research firm of Ned Davis Research has their own proprietary sentiment indexes called “Crowd Sentiment Poll”. Technically they have several such sentiment indicators covering major indexes or sectors but the one that is most closely watched is the one for the stock market (S&P 500).
There is nothing magical about this sentiment index other than it is an aggregate measure comprised of many other sentiment indicators that are already familiar to us as well as option trading data. I’ve referred to it several times previously: in early August and then towards the end of August 2009 and most recently just this past week:
According to NDR their proprietary “Crowd Sentiment Poll” which is made up of several individual sentiment measures is now at “Extreme Optimism”. During the recent market correction in February this measure was at the other extreme, registering “Extreme Pessimism” so within a very short period of time things have changed dramatically.
To be precise, Ned Davis Research defines “Extreme Optimism” as any level above 61.5%. As you can see from the chart below, that means we’ve been in “Extreme” territory since early March 2010. The only other time that the Crowd Sentiment Poll was more bullish was in early January 2010 when it was just shy of 70%. Note how every time this sentiment reached a peak above 65% the stock market did likewise.
[At the request of NDR I’ve removed the chart]
For those not familiar with DeMark’s work, it is a mechanical and totally objective indicator that attempts to anticipate both tops and bottoms. It has an especially avid following within institutional and hedge fund trading circles. DeMark has written several books outlining his indicators in detail.
To give you a quick idea, here is a run-down of the TD Sequential Set-Up criteria:
- For a Buy signal: 9 consecutive price closes that are lower than the closes 4 price bars earlier.
- For a Sell signal: 9 consecutive price closes that are higher than the closes 4 price bars earlier.
This leads to a countdown:
- For a buy signal: 13 closes where each close is less than or equal to the low 2 price bars earlier.
- For a sell signal: 13 closes where each close is greater than or equal to the low 2 price bars earlier.
For more, see this article:
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