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| Investor's
Intelligence Survey |
INVESTOR'S
INTELLIGENCE RESULTS IDENTIFY BULLS AND BEARS AND ARE A CONTRARY
INDICATOR
Throughout our last several Swing Trader issues I've
brought you an educational series on how to read the signals given off
by the overall market. So far we have discussed six major market
measures: New Highs and New Lows, the Advance/Decline Line, the Arms
Index (or Trin), the McClellan Oscillator (and the associated Summation
Index), the Put/Call Ratio and the Volatility Index.
Each of these measures gives the swing trader new information. New Highs
and Lows and the Advance/Decline Line are long-term measures. They help
the swing trader judge the market's overall health. The Arms Index and
McClellan Oscillator describe whether the market is overbought or
oversold in the short term (and therefore prone to a reversal). The
Volatility Index and its cousin, the Put/Call ratio, are sentiment
indicators. Sentiment indicators describe the current level of
bullishness or bearishness in the market.
Another important sentiment indicator is the Investor's Intelligence
survey of market advisors. Each week Investor's Intelligence surveys
approximately 150 market newsletter writers. They take this survey on
Friday and release the results to the media the following Wednesday.
These results can then be charted. Over time, astute swing traders can
use this data to judge abnormal peaks in bullish or bearish sentiment.
Like other sentiment indicators, the Investor's Intelligence figure is
thought of as a contrary indicator. This is because the majority of
investment advisors tend to trade with the prevailing trend. As the
market becomes more bullish, their newsletter outlook and picks come
increasingly from the long side. As the market declines, they will
increasingly advocate a bearish position. Most of the time these
investment advisors are correct. However, at major market turning points
they can lag the market. It is in these scenarios that the Investor's
Intelligence survey can provide traders with a contrary indicator.
The manner in which the survey is calculated is pretty straightforward
-- bullish and bearish advisors are tabulated and the numbers in each
camp are totaled together. The end result of this process is a
percentage value -- the % of advisors who are bullish on the market's
near-term prospects.
Traders can interpret the Investor's Intelligence survey figures in a
number of ways. If less than 40% of advisors are bullish, then that is
often seen as a positive. After all, the trend followers are likely to
be incorrect at important reversals. Meanwhile, a reading between 41%
and 54% is considered neutral. Survey results of over 55% bulls tend to
be bearish and warn of an eventual market top.
In addition to this analysis, traders can analyze the data by examining
the ratio of bullish to bearish advisors. Generally, peaks of more than
2:1 are a warning of vulnerable markets. Of course, note that extremes
in advisor sentiment are a lagging indicator. In other words, they peak
or trough well in advance of a market turn. Their value is that they
send a long-term warning that a reversal may be afoot.
Since advisors and the market itself tend to always have a bullish bias,
the extreme numbers vary for bearish readings. If more than 50% of
advisors are bearish, then that's a contrarian signal and is read
bullishly. Between 21% and 49% is a neutral reading. And finally, if
less than 20% of advisors are bearish, then this is seen as a negative
signal. Note that the bullish and bearish advisors, when totaled, do not
add up to 100. The reason for this is that a certain percentage of
advisors are often in the correction camp. Therefore, they are not
counted as either bullish or bearish.
Remember the observation I have made previously in this newsletter that
an S&P close below 1091.33 would be a bear market signal and that
the McClellan Oscillator Summation Index is now in bear market
territory? Well, careful traders should read the current Investor's
Intelligence figures with this context in mind. First, the number of
bullish advisors is still 46%. That is down from near the 60% reading
scored in late 2003 and early 2004. Given the market's vulnerability,
that number, however, is still very high. The bearish advisors total is
at 23.7%. Note how low that figure is compared to readings over the last
several years. Even at the peak of the bubble years in 2000 the number
of bears was generally greater than 30%!
Also observe the bullish to bearish
advisor ratio of 1.96. We have seen two recent spikes in this data to
about 3.00. The last time the ratio was that high was in 1992 -- 12
years ago! Spikes of this kind are associated with extremes in bullish
sentiment and in the past have at times preceded an important market
top. While the ratio is now below 2.0, it is still very elevated. It is
approximately what it was at the peak of the bubble years in 2000.
When combined with the McClellan
Oscillator Summation Index and an analysis of the new highs/new lows and
Advance/Decline line (I've discussed all of these in recent issues), the
Investor's Intelligence figures provide us with yet another potentially
worrisome indicator that the stock market may be entering into a stage
III top and that this bull market may be coming to an end. As I've
recently argued, swing traders should be alert to this potential
reversal in the Primary trend since it will dramatically affect trading
strategy.
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