Investor Sentiment Charts Worked Wonders In 2016

A look at two unique 2016 investor sentiment charts… and how valuable they were in timing market trend changes.

The first chart was one of the “people’s choice charts” in my 2016 End of Year Special report. It shows a different perspective on investor sentiment which called the bottom of the market and signaled the start of the new bull market.

The indicator uses a combination of the AAII and II surveys and is a monthly view of a 12 month smoothing of monthly average readings (i.e. a longer term and slower moving look at what can often be a noisy indicator week-to-week). It is the red line in the chart below vs the black line of the S&P 500 Index (INDEXSP:.INX).

In the past whenever the indicator turns down to these levels it often marks a major stock market bottom. In fact whenever the indicator turns down by substantial amount and then turns up (like it has now) it has historically marked either a major short-term bottom or a bullish continuation.

The good news is it’s still not towards levels that see the market stall out. But then again, this indicator seems to work better at picking bottoms than tops.

The second chart looks at something that gets missed by taking a 12 month average – i.e. seasonal patterns in sentiment across the year.

The pattern in investor sentiment (again a combination of AAII & II) largely tracks that of the stock market (usually good into year end, and at the start of the year, and less so around the middle of the year). It’s interesting to note how sentiment gets worn down as the year progresses (until 4Q).

What makes this chart really interesting is when we include the economic surprise index, which also seems to show some seasonality. And in this respect there is a warning of sorts for early next year – the typical pattern is that the economic surprise index takes a dive in Q1 – so while it’s only one factor, it may well be worth considering as we gear up for the new year.

As these two charts show, sometimes a different perspective and a dash of creativity can produce some really unique and valuable insights.

Thanks for your support in 2016 and best of luck for 2017!

Twitter:  @Callum_Thomas

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.