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Ned Davis Research: Crowd Sentiment Poll At Extreme Optimism at Trader’s Narrative

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]

demark indicators book cover.gifThe chart is courtesy of a trader who wanted to share with other readers his unique combination of NDR’s Crowd Sentiment Poll overlaid with Tom DeMark’s DeMark Sequential and Combo indicators.

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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3 Responses to “Ned Davis Research: Crowd Sentiment Poll At Extreme Optimism”  

  1. 1 Wayne W

    Oh my, Mr. Babak,

    My Todo list just got a bit longer.

    Let’s test drive this baby.

  2. 2 Babak

    Wayne, alright! this is exciting. Can’t wait to see what you come up with. I’ll see if Tom can drop by and enlighten us on how he uses the TD sequential with the NDR’s CSP.

  3. 3 Justatrader

    I do quant/technical analysis for my firm in NYC. I work closely with NDR - Ned Davis Research and Tom Demark. Both are unique and extremely rigorous with details. Ned’s Crowd Sentiment poll does have some trigger levels that they use to buy and sell but I’ve found Ned’s work is solid at capturing intermediate themes. Tom Demark’s work identifies short term from 1 min to 1 year time frames for exhaustion and trend change. I believe markets move due to sentiment and one can gauge a particular move if you can identify the set up in sentiment. Therefore I combined one of the best sentiment polls and one of the trend change identifiers on Bloomberg using the CIX function. I first downloaded all of Ned’s Crowd Sentiment Poll to Excel from 1974 inception on Bloomberg and created a new chart inserting Tom Demark’s Sequential and Combo indicators. There are many more indicators that are interesting and useful but for this exercise I used the 2 most common. Tom has so many indicators that he uses and I can access since I am privileged to be in his exclusive chat room on Bloomberg. The chart that I created has about a 90% success rate in identifying direction changes. Some exhaustions take up to 10 days and some others are to the day. The times when this did not work was usually when the sentiment was not at an extreme and caught in the middle of the range. I strongly recommend people read Ned Davis’ book “Being right or making money” as well Jason Perl’s book on Demark Indicators above. It’s much better than Tom’s books because it’s a little easier to read. You can also go to to learn more about Tom Demark’s work. I spoke with a person from Tom’s office the other day and heard some plans for more reasonable plans for a retail investor. I love that Tom wants all to see his work so that is one reason why I shared my chart too. If anyone has any comments, suggestions for other CIX charts on any other indicators please email me to discuss. Thanks everyone - good luck trading.

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