Using the Daily Sentiment Index
03/26/2014 9:09 am EST
Jake Bernstein discusses his daily sentiment index and why it is really much more than just a contrary indicator.
OB: This earmarks, I think, 27 years, Jake Bernstein, since you released the Daily Sentiment Index. Over all that span of time, how has it changed? Is it still as valid as it once was? Tell us about the index.
JAKE BERNSTEIN: You seem to know more about my business than I do. Has it been 27 years?
ROB: I was 15 years old when you released the Daily Sentiment Index.
JAKE BERNSTEIN: You are making me feel old. The Daily Sentiment Index is a daily assessment of small trader sentiment based on contrary opinions so that when the sentiment index is very high, 85% to 90% small trader bullish, you are close to a top. When the sentiment is really lower, you are close to a bottom. It has changed in that the numbers do not vary as radically as they used to many years ago, partly because the size of the assessment is bigger. In addition to that, it seems to be more of a leading indicator than ever before, so the one thing that is really important is do not assume that just because the public is very bullish on a market that it is over. The public can be right for a long time and so it is a leading indicator. You have to use timing with it, so in that sense it has changed because I have learned how to use it better. The thing that is most gratifying about the daily sentiment is that some of the top, top, without mentioning names, hedge funds, traders, banks, brokerages in the world are using the sentiment index and I do not even advertise the thing. This is a really beautiful thing for me.
ROB: Well the common conception is that it is a contrarian indicator because it takes into account the smaller retail trader, but that is not, you just mentioned it, and I want to go back to that. It is not necessarily true that it is only a contrarian indicator.
JAKE BERNSTEIN: No, it is not only a contrarian it is a leading indicator. When I was practicing in the mental health field, we had a guy on our unit who was extremely dull. The kids would play a game with him. They would put a nickel in one hand and a dollar in the other and they would say, “Hey, Mike, which one do you want?” He would always pick the nickel. I had him in my office when they said, “Hey, Mike, you know the difference between a dollar and a nickel, why do you always pick the nickel?” He says, “If I pick the dollar, they would stop playing the game.” Sentiment is the same way. If the small trader were always wrong, they would stop playing the game, so you cannot just look at it and say, “Gee the public is too bullish.” You have to use it with timing and that is the key to everything I do, set up, trigger and follow through.
ROB: Well that is amazing advice because the common conception, of course, is that the crowd, the masses, they are wrong, they panic, there is fear, there is greed and whatever and this is a completely, even after 27 years, still a novel approach to taking into account the sentiment of those small traders, right?
JAKE BERNSTEIN: If you look at the Commitment of Traders report and you see that commercials are buying. They can buy for two years all the way down, so it is not different than that. You have to wait for the right moment as a trigger. It is the same concept.
ROB: This is Jake Bernstein on the Daily Sentiment Index. Thank you Jake. You are watching the Money Show Video Network.