Investor Sentiment – Is It Supplying A Warning? April 16

Investor Relations and Global Statistical Arbitrage

Investor Sentiment – Is it Providing a Warning?

Investor sentiment is known as a contrary indicator. By the time the correction ends, investor sentiment has reached a high level of fear and bearishness.

In the other direction, as a rally proceeds, investors become increasingly optimistic and bullish. So by the time the rally has lasted for some time and the market has become overbought and due for a correction, sentiment has reached a high level of bullishness and confidence.

Thus is investor sentiment a ‘contrary' indicator, since it is extremely optimistic at market tops, and extremely pessimistic and bearish at market lows.

It reached 54.6% bullish in October, 2007, at the exact top of the 2003-2007 bull market. And it reached 52.8% bullish on May 8, 2008, which was one week before the market began its serious 2008 bear market plunge.

The last time it reached that level was in October, 2007, near the top of the 2003-2007 bull market. It reached a high of 64% bullish in January of this year, just prior to the January/February correction.

The market cannot be timed by investor sentiment alone.

A potentially overbought market, and unusually high bullish investor sentiment, just as the market approaches the time when traders will be thinking of the Sell in May and Go Away maxim, is probably not a comfortable situation for bullish investors.