Investor Sentiment Metrics: For the Ordinary Investor?

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?


  1. says

    Agreed. So often people try to beat the market when in fact, being a studious investor who rebalances, has proper allocation, does dollar cost averaging, owns well-diversified quality funds would do a lot better in so many cases.

    • Squirrelers says

      Roshawn – I agree that being a studious investor and makes it a practice to do the things you suggest can lead you to doing possibly as well or better. It’s the “blocking and tackling” fundamentals that count.

  2. says

    If you don’t have time to follow the market and work hard at knowing your sector of choice, stick to index funds.

    My DIY stock portfolio is not diversified, but I spend alot of time researching my sector and so far it has paid off.

    When it comes to buying stocks, I love days with triple digit losses, the best bang for the buck!

    • Squirrelers says

      Beating The Index – I’m with you on index funds. I tend to focus on this approach for the most part. Simple, easy, low fees. I have made some opportunistic investments in the past, albeit small in dollar amount. Those big loss days, as you alluded to, are often big buying opportunities, for those so inclined.

  3. says

    I used to be a more involved with buying individual stocks, but I don’t have the time to keep up with it as much anymore. So, I also am in the ‘index fund’ group. I am sure I am better off that way anyway. I used to enjoy digging into individual stocks, but once some started overreacting to earning reports and such, I got a little queasy and jumped off the roller coaster.

    • Squirrelers says

      Everyday Tips – I too am more in the index fund group. It’s a matter of time, to a large degree for me, but also performance net of fees. Other than some opportunistic purchases of individual stocks (at very small amounts), and small amounts of company stock earned, I have focused on funds.

  4. says

    The more I learn about the great investors, the more I realize they ignore most of the technical indicators. They concentrate on fundamentals, profits and the future business prospects of the compaines they buy. Over the long haul, the stochastics and the moving average don’t mean very much. Unless you are a day trader, turning off CNBC could be your best investment tip.

    • Squirrelers says

      Hope to Prosper – I have tended to focus more on index funds. Not exclusively, but to a large degree. While I have made other fund purchases, and some small opportunistic stock purchases, I don’t watch the daily financial news for the purposes of information for quick decisions.

  5. says

    Yeah, I do index funds now. I took a bath during the crash and the irony was that was when I paid a broker to manage my portfolio because I didn’t have the time to deal with it. That decision cost me a boatload of money and I fired him 8 months later. I went to index funds right after and it’s been fine with me. I may add a few individual stocks as I get more cash, but for now I feel like if the market starts tanking, it’ll a lot easier to sell 1 ETF index fund than 20 stocks. Seems like you can react quicker that way.

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