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While his work on valuation and bubbles receives more attention, Prof. Robert J. Shiller has been studying stock market sentiment for a long time. He has created several surveys which measure different aspects of sentiment. One of these is the Buy-on-Dips confidence index which we explored back in March. Unfortunately it has only about a 100 data points and doesn’t seem to provide much value added.
Today I wanted to check in with another one of Shiller’s surveys, the Crash Confidence Index. This new index, like the Buy on Dips confidence index, is limited in sample size but from the brief available data it seems to be provide much more insight.
The Crash Confidence Index is the percentage who think that “the probability of a catastrophic stock market crash in the US, like that of October 28, 1929 or October 19, 1987″ is less than 10%. So the higher the number, the less likely a crash is perceived as being imminent.
The highest level for institutional respondents was 58 on April 2006. While individual investors were the most confident on October 2003 when 49% believed that a crash was unlikely.
Not surprisingly, we tend to extrapolate the present into the future so during the darkest days of the stock market, further catastrophic declines in the form of a crash appear more likely. During the low of the last bear market cycle (November 2002) the institutional respondents were very pessimistic (only 21% believe a crash unlikely).
During this bear market cycle, institutional investors were the most pessimistic in February 2009 while individual investors took longer to be persuaded that things were improving. They were most pessimistic in April 2009. Since then both camps have recovered sharply. However, if you notice, we are still at very low levels historically.
If we compare the sentiment during the recovery from the last bear market bottom the difference is remarkable. In the six months from November 2002 to May 2003 the institutional Crash Confidence index almost doubled while the stock market as measured by the S&P 500 had hardly budged at all.
Today, we have a stock market that has rallied almost 60% and yet, the Crash Confidence index in relation to that performance, has gone from 18 to 28. While that is a respectable recovery in sentiment as measured by this index, it is hardly commensurate for the performance that the stock market has lavished on us.
To learn more about the Crash Confidence index visit the Yale Center for Finance.
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