[轉帖] Keep Eye Out For Market Turns When All Pundits Think The Same

Keep Eye Out For Market Turns When All Pundits Think The Same
Wednesday June 29, 7:00 pm ET
Juan Carlos Arancibia

The stock market has a way of humbling investors -- even the ones who get paid to predict the market's direction.

Among those are market newsletter editors, who as a group tend to have a deplorable record during market extremes.

They have often shown to be most bullish when the market is peaking and most bearish when the market is touching bottom. It's just another example of how the market can make a mockery of investors' opinions, intuition and emotions -- a theme reinforced in this current informal series of columns on investor psychology.

The folly of market predictions can be turned to a positive end by using excessive bullish or bearish sentiment as a contrarian indicator.

However, when it comes to timing one's own entry into the market, and exit, treat that indicator as one of secondary importance. Let the daily price and volume action of the major indexes and leading stocks be your primary guide.

IBD each day prints a graph that tracks the weekly readings of the Investors Intelligence bulls/bears survey. New Rochelle, N.Y.-based Chartcraft tracks the newsletters and separates them into either bulls or bears, depending on each editor's most recent market call.

Generally speaking, the market is considered too frothy when more than 55% of newsletter editors are bullish, or when less than 20% are bearish (expecting a market decline of 20% or more). And the market may be near a bottom when less than 35% are bullish or when more than 50% are bearish.

Investors Intelligence also tracks a percentage of folks who expect to see an intermediate correction, meaning a decline of between 10% and 20%.

The "bullish" and "bearish" results of the survey are plotted, going back a year, inside the Psychological Market Indicators box of IBD's General Markets & Sectors page (today on B2). The most recent reading is shown, and the 12-month line helps you see peaks and the general trend in sentiment.

Pay special attention to the market when bearishness exceeds bullishness. This is easy to spot on the IBD chart. You'll see the lines cross, indicating the pundits are generally more bearish than bullish. When this happens and the market has been in a serious slump, keep an eye out for a possible follow-through rally by one or more of the major indexes. Also begin making a watch list of high-quality stocks that are forming good bases.

When the Nasdaq bottomed in October 2002, the percentage of bullish advisers shriveled to just 28.4% (point 1). Meanwhile bearish advisers spiked to 43.2% (point 2), up from as low as 22.7% back in January 2002, when the market was still deep in its wretched decline.

More recently, the percentage of newsletter editors making bearish calls jumped to a 16-month high in late August 2004. This happened shortly after the market started a major move up with a follow-through on Aug. 18 that year.

But while the bulls/bears survey can tell you when optimism or pessimism is going overboard, it's far from perfect as a market-timing tool, especially when it comes to spotting market peaks.

"While the Advisory Sentiment Indicator does forecast some major peaks and troughs, it is by no means perfect and certainly lacks the consistency needed to qualify as the Holy Grail," Martin J. Pring wrote in "Investment Psychology Explained."

The most reliable way to know when the market bottoms is when at least one of the major indexes has a follow-through rally confirmation. Watch for a gain of at least 1.7% by the Nasdaq, the S& 500, the small-cap S& 600, or the Dow, that takes place on the fourth to 10th day of a new market rally.

And the best signal of a market top is when indexes experience heavy distribution after a significant run-up, and leading stocks are cratering all around you.