Research Piece: Investor's Intelligence Bears

author/source: Fred Meissner, CMT

Research Piece: December 2009 - by Fred Meissner, CMT

This month’s research piece is on sentiment in general, and the Investor’s Intelligence numbers in particular. Sentiment numbers are derived from two types of sources. One is empirical market activity, such as options activity or mutual fund cash levels analysis. The other source is various sentiment polls conducted by organizations. Sentiment indicators rely on the philosophy of contrary opinion, which suggests that markets will move against the majority position much of the time.

At The FRED Report, we tend to look more closely at measures of BEARISH opinion. We feel that while there can be complacent (and therefore inactive) Bulls, and investors expecting a correction, it is unusual for Bears to remain inactive. They usually sell, and sell quickly. In addition, they are not quick to buy. This is why high bearish sentiment numbers in a rising market are so positive – they are a measure of fuel for a bull move as they are forced to deploy cash. Readers can see our sentiment index in this publication which tracks bearish opinion only.  We have followed this index for some time.

In the last two weeks we have seen two readings of Investor’s Intelligence Bears numbers in the high teens (17.6% and 16.7% bears respectively).  Two low numbers in the teens are rare, in my experience, and we did some analysis (with surprising results!) that we show below.  In the table is all occurrences of numbers below 20 for two weeks or more in a row. We have taken one small liberty with the numbers. In three instances we had long strings of below 20’s that were broken up by just one number above 20. We combined these, as it does not impact the data. So you have them, these were #4, #14 and #15. Otherwise, we take the weekly S&P 500 (SPX) closing number at the start of the series, then at the end of the series, and compare it to the closing week of the third month after the series.

Readers can judge the results for themselves, and also look at intervening weeks if they so choose. Several things stand out for us, however. The first is that there were only 21 occurrences of this type of sentiment number since 1971 (38 Years) so this is rather rare. Second, of the 21 occurrences, in only 8 was the SPX lower at the end of the series of low numbers. Last, and perhaps most interesting, in only 7 of the 21 occurrences the SPX was lower three months later. Readers should check for themselves the variance between the end of the series and three months out – it is not consistent to me, nor significant. The biggest positive three month change was in 2003 at 99.04 which was around a 10% up-move from the end of the series. The worst was the crash of 1987 at 79.82, which at the time was around a 25% down-move from the end of the series. As you can see from the table, the 1987 series had relatively few occurrences. 

Throughout my career, I have always used sentiment indicators as CONDITION indicators and not timing tools. By this I mean that they can suggest trading conditions have worsened, or improved, but without confirmation from the indicators and trading set-ups on the charts, they should not be acted upon independently. This seems to be the case now. Certainly, the caution flags are out – but until other indicators confirm, we have to give the uptrend the nod. Please see the table below – the results are surprising!








Fred Meissner is primarily responsible for the research in this report and certifies that: (1) all of the views expressed in this research accurately reflect his personal views about any and all of the subject securities or issuers; and (2) no part of his compensation was, is, or will be directly or indirectly related to the specific recommendations or view expressed him in this research.
This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report.  Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information.  The information in this report has been obtained or derived from sources believed by Fredco Holdings, Inc. to be reliable, but Fredco Holdings, Inc. does not represent that this information is accurate or complete.  Any opinions or estimates contained in this report represent the judgment of Fredco Holdings, Inc.  at this time and are subject to change without notice.  Fredco Holdings, Inc.  or its employees, officers, directors, principals, agents, affiliates or adviser may from time to time provide advice with respect to, acquire, short sell, hold or sell a position in, the securities or instruments named or described in this report.
Fredco Holdings, Inc. does not have investment banking relationships with any of the companies mentioned in this report and does not conduct investment banking business, in general.  Fredco Holdings, Inc.  and its employees do not receive compensation of any kind from any of the companies in this report.  Fredco Holdings, Inc. , its directors,  officers, principals, agents, advisers, affiliates and employees may maintain a financial position in the securities mentioned in this report, provided however that no buying or selling  activity will be taken with respect to a security referenced in a report by such parties within three days of such report’s publication.
The information contained herein was prepared by Fredco Holdings, Inc., which is solely responsible for the contents of this report.
Copyright 2010-2024 Fredco Holdings, Inc..  All rights reserved. This report is a publication of Fredco Holdings, Inc.  located at 4514 Chamblee-Dunwoody Rd, Suite 112, Dunwoody, GA 30338. 




Who is Fred Meissner, CMT?
Listen here:

The FRED Report is not authorized, endorsed, or affiliated with the Federal Reserve of St Louis and its FRED Economic Data.