Combining Sentiment Indicators For Timing
by Joe Duarte
Market sentiment can be useful in market timing, and mutual funds in particular. Here's a method in
which a careful perusal of Investor's Intelligence, Market Vane and Barron's can help you predict the
best times to buy.
Market timing mutual fund purchases can be simplified by close observation of market sentiment. In
his book Winning on Wall Street , technician Martin Zweig describes his use of sentiment indicators as
predictors of future stock market direction. He describes two in detail: the 13-week moving average of
the ratio of bulls/bulls + bears as provided by Investor's Intelligence (Figure 2), and the four-week
moving average of bullish ads in Barron's (Figure 3).
Although the bullish ads indicator may be initially thought of as subjective, what's important is consistent
interpretation on the part of the investor. I rate the ads as bullish or bearish, depending on how I feel after
I read them, and I rate them the same way as they repeat in each issue. Any newsletter, company or
mutual fund ad that touts its return I rate as bullish. If the word "short" or "put" is contained in the ad, I
ignore the ad for the purpose of this oscillator, as I ignore neutral and negative ads.
I have added the Friday put/call ratio obtained in the Monday edition of The Wall Street Journal or
Investor's Business Daily, the weekly Bullish Consensus numbers for Eurodollars, Treasury bonds and
stock index futures, all found in Barron's, and whether the Standard & Poor's 500 is trading above its
20-day moving average to create a seven-indicator sentiment oscillator (Figures 3, 4, 5 and 6). A buy
signal gives each indicator a value of 2 points. A sell signal is worth zero points.