|Peter Eliades regarding the Investors Intelligence Poll.|
There has been some serious (but polite, of course) arguments recently concerning market sentiment and I believe most of the arguments contain valid points. I must admit to being somewhat bothered, however by the intimation that the Investors Intelligence survey is not important because ......... you can fill in the blanks. My friend via correspondence, my colleague and contemporary, Donald Hayes has been dissing it for quite some time now and you have to believe it's because he does not like its message. Let me say up front that I have enormous respect for Don Hays' talent. He has been on the right side of the market far more often than on the wrong, but his preference for AAII data over that from Investors Intelligence is a puzzlement to me and I can explain it only by thinking they fit his market view while Investors Intelligence data do not. How many are truly knowledgeable as to the history of the two sources of sentiment data? Perhaps a quick review is in order. AAII data began in mid 1987 and was collected by post card response from individual investors. It started out with well under 100 responses per week but began to grow in the mid 1990s. Unfortunately, the responses were never from exactly the same people and they differed in number from week to week. In 1993, for example, I read these numbers as the number of responses for 5 consecutive weeks: 73 198 157 197 and 306.Perhaps the data were helpful but there was no science or uniformity behind the consistency of the polling. In January 2000, AAII switched from post card polling to website polling. It still faced the problem of not polling the same universe each week so as to measure the sentiment from the same basket, if you will. There was no consistency to the week to week data, and it faced the even larger problem of making all data before Jan 2000 inconsistent with data after Jan 2000.
There are other sentiment pollers of merit that have been around for quite awhile, of course, but for the purposes of this discussion I wanted to present a long history of the importance and relative consistency of Investors Intelligence data.
How about Investors Intelligence? They have been conducting their survey for over 40 years. They use exactly the same newsletter writers week after week so the basket of polling remains identical. Yes, indeed, they have added newsletters over the years, but very slowly and never enough to distort the sampling basket on a week to week or even month to month basis. As to the argument that you would prefer to know what they are doing with their money rather than what they are saying, I will grant you some validity. But take another few minutes please, and read these two excerpts from my December 2002 and January 2003 newsletters. I find it difficult to believe that you will read the excerpts and come away thinking the Investors Intelligence numbers are unimportant or tell us little or nothing. I will let the history of the numbers speak for itself. Here are the excerpts from the two newsletters 3 and 4 months ago:
"Perhaps the most important argument, however, against having seen a market bottom of importance continues to be market sentiment. The oldest surveyor of market sentiment in the stock market is Investors Intelligence (30 Church St., PO Box 2046, New Rochelle, NY 10801) headed up by the talented Michael Burke. For almost 40 years, they have been compiling weekly (it was initially bi-weekly) sentiment data from newsletter writers. Typically, at an important market bottom, bears will have outnumbered bulls by a significant margin for a significant period of time. Perhaps a few examples will make the picture clearer. In May 1970, the Dow Jones Industrial Average reached an important low. For 27 of the prior 28 weeks before that bottom was achieved, there were more bears than bulls on the Investors Intelligence (30 Church St., PO Box 2046, New Rochelle, NY 10801) survey. In fact, the bearishness continued will beyond the bottom and for almost the next three months after the low, there were more bears than bulls in the advisor survey. The next major bottom occurred in October 1974. Prior to the low achieved in early October that year, there were 27 consecutive weeks with more bears than bulls. During those 27 weeks, the average plurality of bears over bulls was 25%. In the important bottom registered in early March 1978, 17 of the 20 previous weeks had registered more bears than bulls. Before the very major low in August 1982, 34 of the 35 previous week's had registered more bears than bulls with the average plurality of bears over bulls at 18%. At the late July 1984 bottom, even after it was obvious that the Dow had finally broken above the 16 year resistance level of 1000, there were 19 consecutive weeks of bearish over bullish advisers. Even after the very major low in October-December 1987, the market continued to climb a wall of worry. From early April 1988 through early February 1989, there were only three weeks in which there were more bulls than bears. In late 1990-early 1991, there were 26 consecutive weeks of more bears than bulls prior to the market's explosion in early 1991. In 1994-1995, the last major bottom prior to the market's excursion into bubble mania, there were 46 consecutive weeks of more bears than bulls. Imagine that! Almost one full year went by with more bears than bulls every single week. The most amazing part of that time period was that the Dow Jones Industrial Average was higher after that 46 week stretch than it was at the beginning of it. Move forward to 1998. Even during that short lived decline that culminated in early October 1998, there were seven consecutive weeks with more bears than bulls.
Now let's examine the last few years in the light of prior history. The Dow Jones Industrial Average reached its all-time high on January 14th, 2000. Over the next 20 months, while the Nasdaq Composite Index suffered one of the greatest declines of any index in market history, a decline of 67%, there was not one single weekly survey showing more bears than bulls. Finally over a year after virtually every market index had reached its all-time high, and perhaps precipitated more by the events of September 11th, 2001 than by the market itself, there were more bears than bulls for the first time in 153 weeks. The plurality of bears over bulls was almost minuscule considering the gravity of the events that had occurred. The greatest plurality over the three consecutive weeks showing more bears than bulls in September 2001 was 8.4%. After those three consecutive weeks showing a marginal plurality of bears over bulls, another 41 weeks went by without a bearish plurality. Fast forward to this year. Finally, in July 2002, after almost four years had gone by with only three weekly readings showing a plurality of bears over bulls, it occurred again in mid July. By then, the Nasdaq Composite had declined a stunning 77%. Please stop and consider this in the light of the sentiment data we presented to you above. Examine the number of weeks of bearish opinion that have been required in the past to set up a major market bottom. Compare that to what we have seen over the past few years. Even this year, during which all the major indexes have seen major declines, there has not been one stretch of three consecutive weeks with a plurality of bears over bulls. There were two consecutive weeks in July when, by the way, the greatest plurality of bears over bulls was 4.2%, and there were two consecutive weeks in October. One of those weeks showed a plurality of just under 15% bears over bulls, but it was enough to get the bulls excited on a contrary opinion basis, rejoicing at the smallest bullish sentiment reading since 1994. Amazingly, that lack of bullish sentiment was reversed in one week and by the next week there was a healthy plurality of bulls over bears once again. Those are the facts. How anyone with a sense of market history and the interaction between sentiment readings and important market bottoms can believe that we have seen a major market low should stretch the credulity of believers in history. Sorry, bulls! Unless you have rewritten the books, market history tells us there is no way we have seen an important market bottom. In fact, after the bubble mania that we saw in the late 1990s, one could legitimately argue that the next important bottom will stretch the limits of prior bearish sentiment that generally accompanies market bottoms.
Since the October 1998 market bottom to the present day, there have been only nine weeks with a plurality of bears over bulls. Let's put that in perspective. At the October 1998 bottom, there were 36 weeks over the preceding four years with more bears than bulls. At the December 1994 bottom, there were 58 weeks over the preceding four years with more bears than bulls. At the October 1990 bottom, there were 86 weeks over the preceding four years with more bears than bulls. At the December 1987 bottom, there were 31 weeks. At the August 1982 bottom, there were 132 weeks. At the March 1978 bottom, there were 53 weeks. Finally, at the October 1974 low, there were 53 weeks. Was that an important market bottom we saw in October 2002? Step back dispassionately, look at the statistics, then give us your judgment.
2)In our November and December newsletters, we went into great detail about market sentiment as expressed by newsletter writers and as surveyed by Investors Intelligence (30 Church St., PO Box 2046, New Rochelle, NY 10801) . Based on the 40 year history of that indicator, we have not seen any type of capitulation by newsletter writers and their almost stubborn refusal to turn bearish in the face of the worst bear market since at least 1974 can only be judged as very bearish for the market. Over the past several weeks, there is even more bearish evidence from the Investors Intelligence readings. In mid to late January, after one of the worst 3 year performance records in market history and almost directly after the worst performing December in over 70 years, the 10 week moving average of bulls divided by bulls + bears reached its highest level since April 2000. At that time, the Nasdaq Composite was trading at around 4000 level, the Dow was around 11,000, and the S&P was around 1500. In other words, investment advisers, as a group, were as bullish in mid to late January as they were right around the all-time highs. But there is more! In early January, the 10 week moving average of the percentage of bears from the Investors Intelligence survey was at the lowest reading since April-May-June of 1998. That is when the Value Line Composite Geometric Index, an unweighted index reached its all-time high and it corresponded with the highest high on the daily advance/decline line of the New York Stock Exchange in almost 50 years. It has to be a bull's worst nightmare. On our daily update of January 6th, we noted that another comparison might be appropriate. In early October 1987, at the top just prior to the beginning of the decline which led to the crash just a few weeks later, that same 10 week moving average was at 22.5%-not that far away from last week's 26.2% reading. The reading in 1987 occurred in a market that had been up very strongly over the prior five-year period. The readings over the past few weeks occurred in the face of the third consecutive annual decline for the major indexes and the worst December in 70 years. It would be hard to conjure up in your imagination a more bearish combination of market performance and sentiment."
Write your own ending. What you read above is accurate and, I believe, meaningful history.