It can be quite interesting how the stock market tends to move up and down so frequently, with seemingly increased volatility in recent years. While much of this is of course grounded in quantitative analysis – particularly with professional investors – a lot of it is clearly pure speculation. As an average investor, how can one really be sure whether we are headed toward a bull market or bear market?
We can’t. But we can inform our bets with additional information.
In this interesting article in Kiplinger’s, the topic of following investor sentiment to make money in the market is explored. Basically, the idea is that if we follow investor sentiment indicators, we will be better prepared to handle the upcoming swings in the market, either up or down. Often times, it can be smart to bet against the herd.
For example: Investor sentiment on May 5, 2009, indicated the highest ever level of negative sentiment, as measured by one organization’s surveys. After the market summarily bottomed out just 4 days later, it shot back up on a prolonged, sustained recovery.
Looking deeper at the data than surveys, it’s possible to see where different types of investors are placing their money. For example, there is tracking that shows how “smart” investors (example: traders) are betting, and where the “not as smart” investors (example: many ordinary investors) are betting. Going back to the May 2009 example, by the middle of that month, according to the article, the smart money was bullish and the not as smart money retrenched.
Whether you’re looking at surveys or a deeper look, you’ll be spending a couple of hundred dollars annually.
Now, I’m a quantitative, analytical person when I need to be. These types of approaches are pretty cool, I think. I also think it’s important for all of us to keep our eyes open to the macro trends that are taking shape in the economy.
That said, I suspect that going down this path might be overkill for most folks. Frankly, given the costs and time, I think the average investor (which includes yours truly) would be better off focusing on index funds when it comes to stocks, and periodic asset allocation. I suspect that this might be a more economical approach that paying for that “extra” information, unless one has significant investments plus free time.
What do you think?