IT PAYS TO BE CONTRARY
On November 26, 2001 our NDR Crowd Sentiment Poll rose to 64.3% bulls. That not only corrected the excessive pessimism
of September 21, 2001 when bulls were just 37.6% (the second lowest reading since 1995), but the 64.3% bulls put the level close
to, but not quite at, the 67.1% bulls that has been the average at psychological extremes since 1995, and it put it in the high-risk zone
above 61.5% bulls where the S&P 500 has fallen 6.4% in the 28.9% of the time it has been in that zone since 1995. This was the
main reason we have been looking for a short-term correction in the market. Currently bulls have fallen to 62.4% (see chart S574,
not shown) but that is still in the high optimism region and thus is slightly negative.
We also have another sentiment poll but this one concentrates on Wall Street Strategists. They are almost always bullish and
they change position slowly, so they aren't much help in short-term timing but they can be useful in looking for high-risk and low-risk
junctures on an intermediate-term basis. Our data goes back to 1985 here. The Wall Street Strategists are 64.2% bullish which
also shows mildly-high optimism.
For additional confirmation, two other intermediate-term sentiment indicators are shown below on chart S558. The first is
NDR's LEXI Sentiment Index and it is currently neutral, but still in a zone where the Dow has gained 10.5% per annum (see bottom
clip of the chart and upper left of top clip for record). The middle clip comes from the venerable Investor Intelligence. Here we
take a four-week smoothing of the number of outright bears plus one-half of those who are long-term bullish but short-term looking
for a correction. The record shows that when this pessimistic crowd climbs above 45% of all advisors, the Dow has moved ahead at
a 20.9% annual rate. But when the outright and short-term bears are below 45%, the Dow has actually lost 0.1%. We are in both
zones about half of the time and yet the results are dramatically different based simply on crowd sentiment. It pays to go contrary to
the crowd. One final point, at the bear market lows in 1978, 1980, 1982, 1984, 1987, 1990, 1994 and 1998, the smoothed bears plus
one-half correction averaged 58%. But at the recent September/October peak of bears, the number was very sub-par at just 52%.
This suggests the possibility that this was not a major low but a trading low and that the upside is probably limited, once the
favorable seasonals have run their course. --Ned www.ndr.com


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