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Catching a Falling Financial Knife

Contrarian Sentiment Indicator Says Stock Markets Have Bottomed

Stock-Markets / Stock Market Sentiment Nov 23, 2012 - 10:17 AM GMT

By: DailyWealth

Stock-Markets

Dr. Steve Sjuggerud writes: Over the last decade, this idea has been "a perfect contrary indicator," my friend Jason Goepfert explained on Monday.

Jason runs the excellent SentimenTrader website – my go-to site for all things "sentiment."



When this indicator has signaled in the past, it's delivered incredible returns in the next two months. (There's only been one exception.) And it just signaled again.

Before I tell you about its specific results, let me show you why it works...

To me, investor sentiment is the most useful way of determining when a market will bottom. Measuring sentiment is more art than science – but Jason has made it as scientific as possible.

Investor sentiment data is most useful – by far – when it is at extremes. The basic idea is this:

When EVERYONE is scared and has sold, it's almost time to buy.

Sentiment indicators are "contrary" indicators because you're buying when fear is at its peak. And right now, according to this particular indicator, one important group of investors is extremely scared... newsletter writers!

It turns out newsletter writers are good contrary indicators. When they are all telling their readers to sell, it's almost time to buy.

Importantly, according to one of Jason's indicators, newsletter writers are really scared. It's time to buy.

I can't divulge the specifics of the indicator (it wouldn't be fair to Jason's paying subscribers). But over the last 10 years, it's had a nearly perfect track record, with 2008 as the only exception. As Jason explained on his website on November 19...

Of the 17 weeks during the other nine years, the S&P sported a positive return over the next two months every time, averaging 4.8%-plus.

The market tended to bottom right away – the maximum loss averaged only -0.1% while the maximum gain averaged 7.3%-plus.

So far, Jason's indicator has been exactly right... After falling for six-straight weeks, the Nasdaq stock index is up again, right on cue, following this latest signal.

I published the latest issue of my True Wealth newsletter last Friday. I didn't have the benefit of this indicator to go on... but I fully agree with Jason. Here's what I wrote:

While the stock market has really taken it on the chin in the last month, I'm still positive... We've just gone through a small correction. Based on investor sentiment numbers, I think we're through the worst of it. Investors are no longer overly optimistic... This is a small correction in the great Bernanke Asset Bubble.

I stand behind my analysis... And Jason's indicator is one more confirmation that this correction in stocks is over.

Trade accordingly...

Good investing,

Steve

P.S. "Since the 2009 market bottom," Jason explains, "the indicator has reached this extreme three times, and all three were perfect inflection points." For more on Jason's work – and the other important indicators he uses to track sentiment – visit his site at www.SentimenTrader.com. (We get no compensation for mentioning SentimenTrader.)

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The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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Catching a Falling Financial Knife