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Kass: The Bob Farrell Sentiment Indicator

This column originally appeared on Real Money Pro at 7:36 a.m. EDT on Aug 8.

NEW YORK (Real Money) -- Among technical analysts over the last five decades, Bob Farrell stood tall.

"Uncle" Bob was the legendary head of technical analysis at Merrill Lynch until late 1992. Among his numerous contributions to the investment business, my favorite was his "10 Market Rules to Remember."

Bob created a market indicator that was simple in its approach but relatively precise in its predictive ability.

The Farrell sentiment study and market indicator takes the bullish percentage in the AAII survey and divides the figure by the bearish percentage plus half the neutrals. He then takes a 10-week moving average.

A bullish (and oversold) buy signal occurs when the 10-week average falls under 0.50 and rises from there. (There is often a two- to three-week lag before the market turns up.)

A bearish (and overbought) sell signal occurs when the 10-week average moves above 1.50 and then begins to fall. (Here, too, there is often a two- to three-week lag before the market turns down.)

Here is a download to the data since late 2002, compiled by a pal/buddy/friend of mine, former (and also legendary) specialist Bill Silver.

As you can see from the recent data, the Farrell sentiment indicator is close to (but not yet at) a buy signal.

I plan to update Bob's indicator on a weekly basis. (The weekly data is available on Thursday afternoons on Bloomberg.)

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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