This chart took quite some time to put together so hopefully some
find it useful and might understand why I have been very reluctant to
add new long-side trade ideas despite the all the bullish rhetoric and
price action since the start of the new year. I've often stated how I
find the various sentiment surveys to be "noise" and only useful (and
actually one of the most useful tools in trading IMO), when at rare
extremes.
To take it a bit further, I don't
even care much about extreme bullish or extreme bearish readings by
themselves but what does get my attention is when the bull to bear
spread is at extremes, such as it currently is. The reason for this is
that we could have a high number of bulls one week but that might not
necessarily be accompanied by a very low reading of bears or vice
versa. However, when the bull-bear spread on the IIAA weekly sentiment
survey reaches the extreme readings of 18% or higher or -18% or lower, I
find these to be some of the most reliable and timely buy or sell
indicators out there. Of course, nothing has a 100% success rate in
trading…not even close. With that being said, I'll let the chart
below do the talking.
I started with the cluster of extreme bearish readings that marked the
end of bear market in March 2009. Each green arrow marks the exact date
(weekly reporting date) of bull-bear spreads of -18% or lower. Those
reading come only when we have an unusually high percentage of bears vs.
an unusually low percentage of bulls (i.e.- a contrarian buy signal).
The red arrows marks weekly bull-bear spreads of 18% or higher, a
contrarian sell signal from extreme bullishness. Note: When I come
across a cluster of consecutive or nearly consecutive extreme readings, I
place the arrow on the last extreme reading. Although every extreme
reading did not mark a major inflection point in the market, every major
inflection point WAS marked (+/-) by one of the readings and those that
didn't, typically marked at least a tradable counter-trend correction.
You can click here to view the chart above in full-size as well as the supporting data (all weekly AAII sentiment data from Feb 2009 to present).
