Checking up on a Few Psychology Indicators

Yesterday, the S&P 500 reached that resistance line formed by the two previous major tops in 2000 and 2007, so today, I want to see how a few of our indicators have been shaping up.

First, let's look at the latest ISEE Sentiment Index and AAII Bears/Bulls Ratio.

These indicators have been an excellent gauge in the past that the future is not as dim as public sentiment projects.  What could possibly generate a positive outlook from all the morose that is overhanging you and me?

So, we know that investors today are risk averse.  We do see some promising signs, but the balance still falls on those seeking safety.  We always like to watch our ratio of NASDAQ (more growth oriented) volume to that of the NYSE (more conservative).

Looking back over these last 10 years, you can see how the market reacted when this ratio revealed a very low ratio of NASDAQ (growth) to NYSE (conservative) volume as it has just done.  Quite often, strangely enough, it has occurred sometimes in the last stages of a mini-rally followed by a decline in the next few weeks.  But even more significant, those "final" declines in the next few weeks turned out to be major buying junctures.

We're still a little cautious on the short-term, but we're watching for the improvements in our Asset Allocation Model necessary to increase the bullishness of our short-term outlook to match that of our long-term outlook on the stock market.

Don Hays

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