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Wednesday, October 10, 2007

 

isee sentiment index


interactive online chart here.



here's the homebaked version. no indicator is perfect, and there are false tells here too. but there's usually at least a minor correction afoot when the spread between the 10dma and 50dma gets over 15%.

there's only two prior occurences of the spread being in the territory of 10/9/7 (over 22%):

-- early december 2002, signalling the onset of a 14% decline in the s&p 500;

-- late november/early december 2004, preceding a 6% top-to-trough decline in the s&p with ultimately ended in april 2005.

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hey gm -- can you speak a little bit to the significance, or possible significance, of the divergence being in one direction (the red arrows,
down) in 2002 and 2004, and in the opposite direction (the green arrows, up) now? perrone

 
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p, my view is that in the 2002 and 2004 cases -- when the spread peaked over 20% -- the market was primed to correct. that condition existing today, maybe instead of a '?' i should put a red arrow.

in both cases, there were periods where the spread narrowed slightly as the market topped but preceding the down move -- maybe we'll see that now? hard to say.

but the converse seems an even more reliable (but not foolproof) indicator -- when the ratio gets below 80%, you may be looking at a deeply oversold condition that could yield a tradeable rally. the dataset would be a lot more interesting in this respect if it extended back through the 2000-2002 bear. that was true again both in february 2007 and august 2007.

in short, at this point i'm looking more at absolute levels of the ratio than divergences. does that address your q?

 
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