Albeit what I call being anecdotal evidence, investor sentiment can tell us something about the direction of the market, especially when reaching extremes IMHO.
Namely as off 7/1 it is reaching extremes in that there are barely any bulls left. According to the AAII survey 23% are bullish, 42% neutral, 35% bearish: http://www.aaii.com/sentimentsurvey. That’s pretty negative sentiment given that long-term average sentiment is 39, 31, 30%, respectively. As such, bearishness is now highest in 11 months: http://charts.stocktwits.com/production/original_39125837.jpg?1435839211. In addition, the 8-week MA of AAII sentiment is now similar to that at the prices lows made in 2003 and 2009: http://charts.stocktwits.com/production/original_39127235.jpg?1435841052. Contrarian indicators!? Let’s take a look. I went ahead and overlaid the 8-week MA of AAII sentiment chart from Ryan Detrick with the actual price (monthly) chart and observed the following:
The two green circles at 2003 and 2009 show when the 8-week SMA is at or below 25% (bullish sentiment). Both coincide exactly with the 2003 and 2009 price low: green vertical lines. The current 8-week SMA reading is almost at the same level; hence Ryan’s question “a generational buying opportunity or different this time?” I therefore went 1-step further and looked at all readings between 30-25%. Those are in orange; 8 total. Of those, 5 resulted in important lows, 2 were during the 2008/2009 market crash, and 1 was during the 2011 correction (Primary II). But, the 2nd circle in 2008 and the one in 2011 represent an 8-week SMA that in both cases barely dipped below 30, if at all, and as such are questionable data points. Hence, the dotted lines. The first orange circle in 2008 is valid, and represent the b-wave rally before the bottom drops out. B-wave are sucker rallies…
As such we can see that the more extreme the reading the more reliable the correlation with a price low is. What’s 100% certain from this study is that over the past 20 years market tops did never occur at such low bullish sentiment readings. That’s a fact.