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Ask TheStreet: Contrarian Cues

Editor's Note: Ask TheStreet is designed to answer questions about the market, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment advice.


What are some of the indicators that contrarians watch in order to know when the market will change direction? Thanks, J.W.

Gregg Greenberg: Contrarian investors heed the mantra of never trusting the masses. They switch from bear to bull when pessimism is rampant and from bull to bear when everyone else sees not a cloud in the sky.

But how do they know when it's time to turn in the other direction?

Sentiment Surveys

Published every Wednesday morning, the Investors Intelligence survey has been widely adopted by the investment community as a contrarian indicator since its inception in 1963. Investors Intelligence studies more than 100 independent market newsletters and assesses each author's current stance on the market: bullish, bearish or correction. Investors looking for a correction are defined as being still optimistic on the markets but waiting to buy at lower levels.

The survey for the week ended April 5 consisted of 49.5% bulls, 27.8% bears and 22.7% in the correction camp. Investors Intelligence considers the norm to be 45% bulls, 35% bears and 20% correction. But for contrarians -- who trade in the opposite direction of sentiment on grounds that general opinion in the market is usually wrong -- this steadily increasing bullish sentiment flashes a sell.

The Investors Intelligence survey provides contrarians with a litmus of professional opinion, which over the years has shown itself just as susceptible to unproductive market emotion. As the Investors Intelligence Web site points out, "Advisers are only wrong when you get too many of them to start thinking the same thing."

For contrarians seeking to track the sentiment of the individual investor rather than the pros, the American Association of Individual Investors maintains a survey on its Web site.

According to the AAII survey, 47.7% of individual investors were bullish, 29.1% were neutral and 23.3% were bearish in the week ending April 5. The bull number was up and the bear number down from the prior week, another worrisome sign for a contrarian.

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