Monday, April 17, 2006

Checking Investor Sentiment

I try to track several different areas of investor sentiment to be gauge the investor landscape. Rarely do they all line up and point to the same message. But sometimes they start to move in directions that have been good indicators in the past that a buying opportunity could be close at hand. And that is what I think we may be seeing now.

Here are some of the indicators I am watching:
  • The AAII bull/bear survey fell 6 points to +18% (45% bulls, 28% bears); this survey often goes into negative territory before the market bottoms
  • The Market Vane survey fell to a 9-week low of 67% bullish; last October this survey dipped below 60%
  • The Rydex Ursa/Nova ratio fell to 0.16 last week, indicating money flowing to the more bearish funds; this indicator hit 0.14 last October
  • The ISE Sentiment index hit 105 last Thursday, which is a new 52-week low; the 10-day ISE is already at levels below last October

In addition to these sentiment indicators, the market is already short-term oversold on both the stochastics and oscillators. They are not yet at levels that would be considered extremely oversold, but could get there in the near-term.

So I think the sentiment indicators are flashing the signal that bearish sentiment is rising, which could coincide with more selling pressure. That is usually the time to update your buylist and prepare for the buying opportunity that could surface when more of these indicators move to extreme readings. And the fact that we are now starting earnings season in earnest could exacerbate this trend.


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