Chart of the Day – Tour of Sentiment Charts

by Enis August 13, 2012 11:26 am • Commentary

I am a fan of the saying, watch what people do, not what they say.  That’s why I generally prefer to watch market prices and market-based indicators rather than investor poll readings like certain sentiment indicators.  But sometimes both the market prices and the poll readings coincide at extremes, and I tend to pay a bit more attention.  The current market seems to be exhibiting some of that extreme behavior.  Here is a rundown of several charts that illustrate that:


First chart is courtesy of Barry Ritholz at The Big Picture blog.  His whole post is worth a read.  Dick Arms (a long-time, groundbreaking technician) wrote about the following VIX vs. stocks chart (one that we’ve pointed out several times):



The next 2 charts are courtesy of SentimentTrader.  First, a look at AAII (American Association of Individual Investors) investor sentiment:



One quick point I’ll make about this chart is that the most bullish extremes are generally not at turning points.  Meaning, in late 2010 or late 2011, when the bullish sentiment was at its extreme, it actually preceded a continuation of the rally.  Whereas the selloff in 2011 was preceded by much less bullish sentiment.  I bring that up because I don’t think the respondents in these surveys are as “stupid” as pundits make them out to be.

The second chart surveys professionals (specifically, the NAIM, or National Association of Investment Managers).



Once again, this chart is near the highs of the last year in terms of bullish sentiment.

I wouldn’t read too much into all these charts.  But when I pair them with all of my other indicators that indicate buying exhaustion, I still anticipate lower prices in short order.  Timing the next down move though will be crucial for our options trades.