The following is an excerpt from the August 22, 2013 blog for Decision Point subscribers.
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 (naaim.org). Cutoff for the poll is Wednesday, and the results are released Thursday.
[Hear More: Eoin Treacy: How Crowd Sentiment Influences Markets]
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 (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.
Technical analysis is a windsock, not a crystal ball.
