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Investor Sentiment Indicators

Investors are emotional creatures and as such, are influenced by basic human traits (i.e., hope, fear, desire and greed). Since people are also social animals and creatures of habits, they tend to experience the 14 stages of emotions when trading/investing - optimism, excitement, thrill, euphoria, anxiety, denial, fear, desperation, panic, capitulation, despondency, depression, hope, and relief. This is the one of the primary reasons why Investors often buy near the top and sell near the bottom of the market. It is simply too difficult for investors to stay objective when they are emotionally invested.


Over the years, numerous sentiment indicators have been created to study the prevailing sentiment of market participants including such popular indicators as: investor sentiment surveys (i.e., American Association of Individual Investor (AAII) and Investors Intelligence (II)); consumer confidence surveys (i.e., University of Michigan Consumer Sentiment and Conference Board Consumer Confidence Index (CCI)), and market sentiment indicators (i.e., S&P 500 Implied Volatility Index (VIX), Put/Call ratio, cash levels, mutual fund money flows, and margin debt).


Although there is no one sentiment indicator that works in all markets and at all times a collective view of the key indicators may offer better insights into street consensus thinking, herd mentality, changes in sentiment trends and most important, extreme market conditions that often precede major stock market tops and bottom. Note that many of these indicators are contrarian by nature and should be interpreted in such a way when analyzing. Attached below are the more popular sentiment indicators.




AAII bull/bear is a weekly survey of mostly retail investors recording their views of the US stock market six months from today. The recent 8/20/19 survey shows bulls at 26.64%, neutral at 33.64% and bears at 39.72%. The survey can be interpreted as neutral-to-bearish sentiments, at least based on historical trends (since 1987) as the average have been 38.0% bulls, 31.5% neutral, and 30.5% bears. The AAII retail sentiment survey is in sharp contrast to the recent weekly Investors Intelligence (II) Bull/Bear survey. This professional investor survey of 100+ advisory services show a decisive bullish tilt of 49.1% bulls, 17.9% bears and 33.0% correction. So the question then becomes why is there such a large discrepancy between retail and professional investors and who is correct?


U of Michigan Consumer Sentiment Index (CSI) is a monthly survey of U.S. consumer confidence levels. The telephone survey captures consumer expectations and the mood of American consumers. Although CSI has been trending lower since its Feb 2018 high (101.40) the CSI is still maintaining above key levels at 85.10/87.20/91.20 (2013 highs/2016/2018 lows). Violation here would signal a major trend shift of U.S. consumers toward a defensive posture. Since U.S. consumer spending accounts for nearly 70% of the US GDP this may warn of the start of the next economic slowdown.


This histogram chart (top half) shows weekly net cash flow changes in billions of dollars of cash moving in and out of money market funds. Note the major breakout during second half of the 2018 and the subsequent explosive rally soon after in 2019. This major shift in flows into money markets is an indication of increasing bearish sentiments. At current pace of net inflows into money market funds we would not be surprised to see a retest of the 2008/2009 levels at 1,132/1,284. The bottom half of the chart also confirms total assets of money market funds increasing this past year.


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