7.24.2006

FOOD FOR THOUGHT


Dr. Brett S on his Trader Feed site has some interesting factoids this morning about the AAII sentiment numbers. In light of the latest 58% bears and only 24% bulls reading, he says we have one of the most bearish readings since 1989. He notes that when bears exceeded bulls my more than 20%, the next 10 weeks in the DJIA have averaged a gain of 4.48% (37 up 9 down). The typical 10 week gain for the DJIA is 1.93% for his entire sample period. When bulls exceed bears by 30% or more, the next 10 weeks in the DJIA have been up an average of .83% which is less than half the average return for his sample.

Bottom line from Dr. Brett,

"Down markets followed by extreme bearish sentiment have tended to be bullish in the intermediate-term; up markets followed by strongly bullish sentiment have tended to yield subnormal returns in the next two months. Occasions in which we've had more than 50% bears have tended to be either major cyclical bottoms or intermediate-term low points during bear markets that have preceded sharp rallies."

The Doc cautions that the sample sizes are small given the clustering of bearish readings at certain points in time.

My take, follow the Alex Elder strategy and pick your spots to short pullups in this strongly downtrending market.

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