Picking the best time to buy or sell a stock can be a tricky endeavor, especially when looking at shorter periods of a few months to a year.
But measures of investor optimism or caution can help to boost the likelihood of making the right decision, says Kirk Lindstrom, a former computer engineer who provides investment advice.
“The time to buy stocks is when there is ‘blood in the streets,’ when others are fearful and selling,” he writes in a Seeking Alpha blog post
. “I like to take profits as markets make new highs then buy back shares when my sentiment charts loudly shout at once ‘buy’ as most investors are afraid and selling.”
Before the most recent economic expansion started in 2009, the average growth period lasted about five years since the end of World War II. These longer-term periods provide a better perspective for investors than the day-to-day market swings.
Lindstrom, who holds a long position in the SPDR S&P 500 exchanged-traded fund (SPY), has six ways to measure investor sentiment that provide clues on the future direction of markets.
“Every week I review my sentiment charts of the weekly data,” he says.
6 Ways to Measure Investor Sentiment
- Put-to-Call Ratio: The ratio of puts to calls, which are option contracts to sell or buy a security at a preset price, is one indicator of the possible direction of the market. The 10-day average of this indicator spiked above 1.25 times when stocks had a correction in 2011, he says.
- American Association of Individual Investors Sentiment Survey: The non-profit AAII surveys its members every week on whether they are optimistic, pessimistic or neutral about the market’s future direction.
- Investors' Intelligence Sentiment Indicator: “IIS questions stock-market newsletter writers once a week to see if they were bullish or bearish on the stock markets in the near-term,” Lindstrom says. “Newsletter writers have a large following as a group and are thus considered ‘market experts.’”
- Ticker Sense Blogger Sentiment vs. S&P500: The Ticker Sense Blogger Sentiment Poll is a survey of the web's most prominent investment bloggers, asking “What is your outlook on the S&P 500 for the next 30 days?" Conducted on a weekly basis, the poll is sent to participants each Thursday, and the results are released on Ticker Sense each Monday.
- National Association of Active Investment Managers: "The NAAIM Exposure Index represents the average exposure to U.S. equity markets reported by our members."
- CNN Money Fear & Greed Index: The CNN Money Fear & Greed Index is derived from seven indicators, according to its website.
“From charting sentiment for nearly 20 years, I've observed that major market (S&P500 or SPY) bottoms usually line up well with major spikes in the sentiment charts,” Lindstrom says.
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