In aggregate, the views of professional forecasters are a good proxy for information that has already been “priced in” by the market.
By eliminating the most popular forecasts, one can identify outcomes that are more likely to occur. There are several good sources
for determining professional consensus opinion, including the BusinessWeek Annual Market Forecast Survey, the annual Barron’s Roundtable ,
and the monthly Merrill Lynch Global Fund Managers Survey.
The ubiquity of the modern media makes just about everyone on the
planet aware of important information overnight. For this reason, the mainstream print and television media are an excellent proxy
for what investors believe as a group - since everyone knows immediately about whatever the media is reporting, and since what everyone
knows is instantly discounted by the market, there is an inverse relationship between the attention devoted by the press to any single
subject area and the likelihood of the problems or opportunities described impacting future stock prices. By collecting and analyzing
media reporting in real time, Houghton & Martin Asset Management identifies outcomes that are least likely to occur
- and thus reduce the number of possibilities from which to choose.
Retail investors are more emotional than professionals and
tend to become more excited about (or discouraged by) a trend the longer the trend persists. In the short-run, this means that individual
investor sentiment is actually a less reliable contrarian indicator, since trends often continue for much longer than the pros expect,
but extreme sentiment among individuals is almost always a good indication of an imminent reversal in the long-term trend. One of
our favorite measurements of retail investor sentiment is the monthly UBS/Gallup Index of Investor Optimism. In addition to investor
surveys, we closely track mutual fund flows for signs of extremes in various categories, such as stocks vs. bonds, foreign vs.
We also monitor the volume of put
option contracts (a bet that the market will fall) versus call option contracts (a bet that the market will rise), having found that
the 10-day and 60-day moving averages for the CBOE Total Put/Call Ratio are excellent gauges of the overall level of fear in the market.
From 2003 through 2006, every major buying opportunity on weakness was marked by several consecutive days of a 1.0+ reading on the
10-day average, and the 60-day average rarely fell below the relatively high level of 0.80. By contrast, at stock market peak in 2000,
immediately prior to the start of the 2000-02 bear market, the 60-day put/call ratio fell below 0.50.
Another important indicator
of extreme sentiment in the market is very high or very low short interest on an overall stock exchange, such as the NYSE and theNASDAQ, or for a specific exchange traded fund. Because every share of stock sold short must be bought back eventually, extremely
high short interest levels are an important indication of strong future demand and suggest that downside risk is limited. Conversely,
very low levels of short interest reflect complacency on the part of bulls and capitulation on the part of bears – a signal that future
demand will likely be weaker.
Important disclaimer: this page contains live references (pointers) to information created and
maintained by other organizations. Please note that Houghton & Martin Asset Management does not control and cannot guarantee the
relevance, timeliness, or accuracy of these outside materials.
