Market Vane Sentiment Survey

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APPLICABLE TIME FRAME(S):  

INTERMEDIATE

UPDATE SCHEDULE:

Each Saturday morning by 11:00 AM EST

REPORTING DELAYS:

One week, so the most recent update will be at least one week old.

EXPLANATION:

The Market Vane Bullish Consensus is compiled daily by tracking the buy and sell recommendations of leading market advisors and CTA's (Commodity Trading Advisers) relative to a particular market. The advice is collected by:

1. Reading a current copy of the market advisors' market letter.

2. Calling hotlines provided by advisors.

3. Contacting major brokerage houses to learn what the house analyst is recommending for the different markets.

4. Reading fax and e-mail sent from advisers.

The buy and sell recommendations from each advisor are tracked during the day to verify the entry and exit of each trading position. The Bullish Consensus is compiled at the end of the day to reflect the open positions of the advisors as of that day's market close. 

The Market Vane consensus number of bullish advisors is posted each week in Barron's.

GUIDELINES:

More than the other sentiment surveys, Market Vane tends to get "stuck" in ranges for very lengthy times, sometimes 4 or 5 years.  Using absolute levels for determining extremes then becomes less useful, since you may not see an "extreme" for 5 years or more.  To counteract these periods, we have enveloped the indicator in Bollinger Bands, so the extremes adapt to the different ranges the survey goes through. 

When it approaches the upper red band, we are seeing excessive bullishness; when it approaches the lower green band, we are seeing excessive bearishness.

The chart below shows two occurrences of the Market Vane bullish percentage reaching extremes.  In April 2001, the advisors polled by Market Vane began to reach extreme levels of bearishness (or at least NOT bullishness).  This caused the bullish percentage to drop nearly two standard deviations from its mean.  Not surprisingly, this extreme in bearishness coincided with the low in the S&P. 

Within two months, however, the advisors resumed their bullish outlook, to an extent that pushed the bullish percentage almost two standard deviations ABOVE its mean.  Once again, the "consensus" was incorrect, as the market fell immediately thereafter.

Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS peaks when the bullish percentage becomes extreme, or troughs immediately after the bullish percentage drops below 16%.  It is a guideline and not a trading system unto itself.

STATS:

*Standard Deviation.  See below:

68% of readings (1 standard deviation) should be between 25% and 43%

95% of readings (2 standard deviations) should be between 16% and 52%

99% of readings (3 standard deviations) should be between 7% and 61%

In other words, we should expect a reading under 16% or over 52% approximately 3 times per year.  Since such a reading would be relatively unusual, it suggests that we may be seeing an unsustainable trend.  These figures assume a normal distribution curve.

ADDITIONAL RESOURCES:

Market Vane Corporation (www.marketvane.net)

Barron's (www.barrons.com)

© 2005  Sundial Capital Research, Inc.  All Rights Reserved.