V.9:7 (279-280): How Accurate Is Sentiment? by William Lansburg

How Accurate Is Sentiment? by William Lansburg

Of all the tools that technicians use in trying to predict the future of the stock market, one of the most common is the sentiment index. Basically, the theory behind the sentiment index holds that it is best to be a contrarian. The theory states that whenever a high percentage of investment advisors are bullish, the market should decline, and when a high percentage of investment advisors are bearish, the market should move up. Some say "the high percentage" should be 60%, while others argue it should be lower, at 55%.

Let's examine the sentiment index to determine how reliable it was for the past nine years, from September 18,1981, to February 9, 1991. I used the sentiment index-from Investor's Intelligence, published in New Rochelle, NY, which tracks the opinions of 140 non-brokerage newsletters weekly detailing the percentage of bulls versus bears. You can also find the percentage of bulls versus bears in Barron's each week.