A 10-Year Overview Of Market Sentiment by Joe Duarte, M.D.
Crowd psychology plays a role in the development of market tops and bottoms. In theory, a bottom forms when the majority of investors are extremely pessimistic, and a top occurs when the investors are uniformly bullish. Here's a review of the past performance of a collection of indicators used to measure investor sentiment.
In my January 1992 STOCKS & COMMODITIES article, I described a group of seven indicators which, when combined, produced an extremely accurate forecaster for higher prices in the Standard & Poor’s 500 index. Over the following six years, the indicator proved to be highly effective in predicting higher prices when gauged a year after giving a buy signal as measured by the S&P 500, during an extraordinary period in market history when the index climbed 708 points and 233 as of February 8, 1998. The indicator combines weekly stock market survey numbers, the S&P 500, a short-term moving average, and two other market sentiment measures.
On August 1, 1997, the combination of the seven indicators — the Super Seven market forecaster — gave its first-ever sell signal. On October 27, the US stock market as measured by the Dow Jones Industrial Average (DJIA) dropped 554 points. On December 26, 1997, and January 7, 1998, the Super Seven gave its second and third sell signals, casting a shadow over the longest bull market of the 20th century.