Sentiment Is Bearish, Which Is Bullish

August 23, 2013

I don't want to put too great a shine on the sentiment indicator readings, but they have changed quite radically this week and deserve some coverage.

Our first chart is of NAAIM* moved down by about half of the prior week's reading. Obviously, this is not as low as it can get, but it is quite a radical one-week change, and is about equal to the low reading in June, which probed to be the price low of that correction.

*NAAIM sentiment polling is conducted by The National Association of Active Investment Managers (www.naaim.org). Cutoff for the poll is Wednesday, and the results are released Thursday.

Approximately 40 NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on Wednesday. Responses can vary widely as indicated below. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group.

Range of Responses

200% Leveraged Short
100% Fully Short
0% to 100% Cash or Hedged to Market Neutral
100% Fully Invested
200% Leveraged Long

The next chart, AAII Investor Sentiment**, is even more bearish than it was in June.

**Sentiment data is provided courtesy of the American Association of Individual Investors (www.aaii.com). Polling is conducted on the AAII web site with a Wednesday cutoff and Thursday release.

Conclusion:  When sentiment becomes excessively bearish, it is bullish for the market because there are too many people on the wrong side. The charts we have shown represent professional money managers and small investors, both of whom have gotten too bearish too fast. The correction may or may not be over, but we could get a bigger price bounce than we were expecting.

Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.

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