Tuesday, September 27, 2005

Stock Market Bears

I think an accurate assesment of investor and trader sentiment is a key element in constructing forecasts for any market. As you know I prefer to make these judgements by reading and watching the national print and broadcast media. I think these outfits are in the business of telling people what they want to hear and so they are a good guide to the public's current fears and hopes.

Even so, it is useful to check conclusions drawn in this way against more objective measurements if they are available and reliable.

As you know I think current stock market sentiment in the USA is remarkable bearish considering that the averages are so close to their bull market highs and considering that the unweighted averages are at historical highs.

A few days ago I showed you a chart of the Rydex cash flow ratio (courtesy of Decsionpoint.com). The blue line shows the daily ratio and it has dropped past the 0.90 level that has been associated with market lows during the past 4 years. Another piece of information from Decisionpoint.com is the cash flow into Rydex bear funds which bet on declining stock prices. This cash flow has reached record highs and indicates an extreme level of bearishness.

You might also want to check out the sentiment readings from Lowrisk.com The latest reading is 64% bears, and equals the highest readings seen during the past 4 years.

Finally, I want to comment on one of the most interesting phenomena in contrary opinion analysis. Ever since the concept of contrary opinion was popularized by Humphrey Neill, stock market predictors have felt it necessary to justify their forecasts by asserting that "the majority" held an opinion opposite to their own, and thus that their forecasts represented a "contrary" view.

I've already shown you objective evidence that bearish sentiment is strong. Now check out the Crystal Ball Forum front page. You see there two sentiment readings. One is called current sentiment and shows the bears at 51%. Thus the majority of Crystal Ball members think the stock market is headed lower from here. But the most intersting number is called "current perception" and shows what these bearish forecasters think other people believe. Notice that the bearish forecasters at Crystal Ball think that 61% of everyone else is bullish. This is a classic case of justifying one's own bearishness by a bald assertion (unsupported by much evidence) that your's is the "contrary" opinion and that "everone else" is bearish.

1 comment:

Tom Drake said...

Carl, I hate to tell you, but people I know stuff the CB sentiment gauge as a joke since volume of responses is so small. LowRisk is presumably a better measure or AAII, or just watching CNBC and the "nutworks".

A well-known sentiment guy says the 20 day m.a. of Nasdaq minus NYSE volume has been running nearly at 2002, 2003 (and 1998) levels recently, and I've had similar comparisons in my very different data.

Jim Jubakk at MSN has a take on it like yours and mine: http://moneycentral.msn.com/content/P129894.asp

See my comment on your 3 peaks and a doomed house too.

Cheers!