Every Wednesday



The theory behind this indicator is that when they reach a consensus of opinion, the public is usually wrong - they get too bullish after prices have risen, and too bearish after they have already fallen.


Because of that tendency, we very often see extremes in opinion right before major changes in trend.  When the public reaches a bullish extreme - a great majority thinks prices will keep rising - then we most often see prices decline going forward instead.  And when they become too bearish, then prices tend to rise.


To calculate this gauge of public opinion, we have created an index based on many of the established surveys currently in existence, some of which are noted below.  We have looked at the history of the surveys to determine how accurately they have measured extremes in the past, and weighted their influence in our indicator appropriately based off that analysis.


The interesting thing we discovered in doing that analysis is that no matter what population the survey monitors, it tends to correlate very highly with all the other populations.  In other words, people tend to think alike, and it's rare to see any of the surveys diverge too far from all the others.  The correlations among them are very high, and have been consistently so for many years.



Like most surveys of public opinion, this one is a contrary indicator.  So when folks become too bullish, we should look for prices to stall out or decline; when they are too bearish, we should look for rallies.


Using strict "overbought" and "oversold" levels tends to not work so well in this regard.  Saying that the public is too pessimistic because only 20% of them are looking for higher prices is too general.  In some commodities, we don't see that kind of extreme for stretches of five years or more - meaning we could have possibly missed out on numerous buying opportunities.


We prefer to use a relative measure of extreme, that being 1.5 standard deviations from a one-year moving average.  So when Public Opinion moves above the red dotted line in the chart, it means that compared to other readings over the past year, we're seeing a statistically extreme value.  You also want to look at the absolute level of Opinion, too - if it's at 90%, then there's no question we're seeing an historic level of bullish opinion.  Watch for readings above 80% (or especially 90%) to spot those dangerous times when the public is overly enthusiastic about a commodity.


Conversely, when Public Opinion moves below the green dotted line, then the public is too pessimistic about the commodity's prospects for further gains compared to their opinion over the past year.  Looking for absolute readings under 20% (or especially 10%) can lead to good longer-term buying opportunities.



These aren't necessarily part of our calculations, but they are additional sources of commodity-related sentiment data.


Market Vane Corporation

Consensus, Inc.

Daily Sentiment Index

Larry Williams


Ned Davis Research, Inc.


2011  Sundial Capital Research, Inc.  All Rights Reserved.