Sentiment Surveys Turn Bullish

03/28/2003 12:00 am EST


David Fried

Editor, The Buyback Letter

David Fried, editor of The Buyback Letter – the definitive source for companies undergoing stock repurchases – has developed a unique sentiment indicator that has recently turned bullish. The indicator is an inverse indicator. The lower the score is, the higher the reading. He adds the total bullish percentage readings of Investors Intelligence, Consensus Index, AAII Index and Market Vane and averages this figure each week. An average reading of over 200 is considered to be negative. Readings of 240 or more have marked market highs over the past few years, while readings of over 200 have warranted a cautious approach. Market lows for the past few years have been marked by readings of approximately 130. Sentiment registered a reading of 123.73 over the past week. His assessment?  Says David, “Our sentiment reading entered positive territory at the end of January and has remained there ever since.  As such, we feel that downside risk is less than normal at this time.”


John Bollinger, in his always fascinating Capital Growth Letter, recently gave a speech at the New York Online Trading Expo and found an unexpected indicator that left him in shock. He explains, “I gave a talk to a standing-room-only crowd of about 280 investors/traders. In the process of the talk I took a poll. The question was about how many people thought that the next big move was going to be another leg down. Somewhere between a quarter and a third of the attendees raised their hands. Fair enough I thought, about 30% bears seemed reasonable given the other surveys. Then came the shocker. When asked how many people thought the next big move would be up, and no one raised their hands. That's right, not a single hand went up, not a bull in sight. It was the most lopsided poll I have ever witnessed. This struck me as an incredibly bullish fact.”


Perhaps Jim Stack, editor of InvesTech Market Analyst, offers the most intriguing historical sentiment-based reasons for current bullishness: "There is very compelling evidence that there are several reasons worth considering. First, it was a successful text of last October’s bottom. None of the major indexes broke through their important support levels of five months ago. Second, the market has just registered one of its most oversold extremes in history. For those who are technically inclined, we would note that the TRIN (or Arms Index) is a tool used for measuring volume flowing into advancing vs. declining stocks. Normally, TRIN readings above 2.0 are relatively rare, averaging just six per year over the past 50+ years. Such readings show abnormally high volume traded in declining stocks – a measure of capitulation. 


“Prior to this bear market, there have been only four instances of having seven days of TRIN readings greater than two within an eight-week period. One occurred near the bottom of the 2962 crash.  One occurred the exact month of the 1966 bear market low. One occurred just before a strong breakout of the 1975-1977 bull market. One came right after the Dow bottom in the 1987 crash.  And one occurred in August 2001, which other than last October was the only significant bottom of the past three years. Where the average number of 2+ TRIN readings is only six per year, the past 12 months have seen 42. And that’s over twice the number of readings in 1974, which was the second highest year and the final year of the second largest bear market of the past 60 years. What do these TRIN readings mean? To us, they suggest widespread capitulation. Now that doesn’t guarantee a market bottom.  But it’s a strong signal that last October’s low may prove to be more than just a short-term bottom.


”And there’s more to add based on recent market action. A volume thrust is created when up volume (volume traded in advancing stocks) overwhelms down volume (volume traded in declining stocks) by at least a seven to one margin. A volume thrust was recently recorded with a ratio of 13 to one. There have only been 25 volume thrusts of this strength in the past 40 years. Of those, five immediately followed major bear market bottoms by less than a week. Bottom line, short-term technical evidence gives us hope that the October lows may indeed have been the final lows to the 2000-2002 bear market.”


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