Investor Sentiment

All investments go through their up-and-down cycles. Today’s hot stock, sector or asset class can quickly flame out and become tomorrows ash-heap. Investors should not to get caught up in the day-to-day noise we are continually exposed to. It is always easier to invest when everyone feels good sees only blue skies ahead. However it is often difficult for people to invest when current events appear bleakest, negative news dominates newspapers, magazines and cable channels, and life as we know it will cease to exist.

The best investing opportunites become available when there is a high level of investor fear or panic. Buying when everyone else is selling is called being a contrarian investor. The idea is that the majority of investors are usually wrong about the market when it is about to turn. When there is excessive optimism, and everyone is buying and speculating, the market will inevitably turn on them. When people are willing to sell out at firesale prices, they belive they have held onto their investments to long and so they sell into the panic and rush into cash, or other investments where they believe that they are safe from the market. Only after the market recovers, and they begin to feel better about it, do they re-enter, and the whole emotional process repeats itself again.

Some world and national events by decade
2000 -1990's1980's1970's1960's

U.S. and international events
2008 Mortgage crisis, JP Morgan collapses, high energy prices
2007 Countrywide collapses, gold and commodities surge
2006 New Fed Chariman, Housing bubble, oil
2005 Hurricane Katrina, London terrorist bombings
2004 Tsunami kills 300,000 in Asia, Madrid terror bombings
2003 Heat wave kills 18,000 in France, U.S. enters Iraq
2002 Moscow theatre siege, Bali bombing, corporate scandals
2001 Afghanistan, WTC bombings, longshoreman strike
2000 Technology stock bubble, Nasdaq bear market begins

Markets and investor sentiment
2000-2002 Bear markets in U.S. & global markets
2003 New Bull market begins
2004 Market correction
2005 Market correction
2006 Market correction
2007 Market correction
2008 Bear market (investor sentiment falls to levels equal to 2002 and 1998 bear market bottoms

Investor and Market Psychology
VolatilityPut/Call RatioShort SellingCash Positions

The VIX measures the implied (or estimated future volatility) of near-term at-the-money SPX (S&P 500) index options.

If the SPX moves sharply up or down, new strike prices are used to calculate the VIX.  Generally, the VIX will typically rise when the market drops and fall when the market rises.  This is not always the case, but the correlation is clear.

The common interpretation of VIX movements is that the VIX will rise when fear or uncertainty does, since there will be a greater demand for put options.  Conversely, when the market is rising, that typically creates complacency on the part of traders and the VIX will fall as the demand for put options decreases.

Big spikes to 30 or higher in the CBOE Volatility Index occurred in August, September and October 1990 (Gulf war), September 1997, August 1998 (Asian flu and S. American currency crises), September 2001 (World Trade Center), September 2002 (near end of the bear market), and just recently in March 2008. These large moves also all occurred at or near the market bottoms.

 
NewslettersConsensusInsidersAAIIRydexMedia

The Investor's Intelligence sentiment survey administered by a private company called Chartcraft and is edited by Michael Burke. This newsletter survey has been conducted weekly since 1963. The survey is constructed by polling 140 investment newsletters and determining whether the publisher is bullish, bearish or neutral. Neutral means generally bullish overall, but expecting a short-term downside correction.

 

Investors tend to purchase a newsletter service when it is bullish as opposed to when it is bearish.

 

Like other contrarian indicators, when the survey shows too many newsletter writers as being bullish 55% or higher), there is a good chance that the markets are near their highs. On the other hand, if there are too many bears (40% or higher), it suggests that the market may soon find a low because there is to much pessimism.

 

During the last ten years there have been several instances when low bullish sentiment and higher bearish sentiment has coincided with market bottoms; (September 1998, September 2001, July and October 2002, Feb/March 2003, March/April 2006. This survey seems to take longer to reflect bearishness than other types of sentiment surveys.

 

The survey results are released every Wednesday and reflects the opinion of newsletters from the previous Friday.

 

http://www.investorsintelligence.com/x/default.html