This Indicator Is Right 95% of the Time... It Says Buy!
By Dr. Steve Sjuggerud
August 1 , 2008
Since 1995, this stock market indicator has flashed "buy" on 41 days.
If you'd bought stocks the day it flashed, and simply held three months, you'd have made money 39 out of 41 times – that's 95% of the time!
The largest of the two losses was -1.7%. Meanwhile, the biggest gain was 33% – in three months. The average gain was an incredible 13% in three months. That's not an "annualized" number... 13% is what you would have made in three months.
I tell you this because the indicator flashed again on July 10.
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Fortunately, you haven't missed the gains yet...
The stock market is only up about 2% since the indicator flashed. To equal their average 13%gain in "buy" mode, stocks still have to rise another 11% in just over two months.
The indicator is simple. It's from Jason Goepfert, who runs sentimenTrader.
The indicator is simply the difference in "Smart Money" Confidence versus "Dumb Money" Confidence. Jason says:
If the Dumb Money Confidence is at 100%, then that means that these bad market timers are supremely confident in a market rally. And history suggests that when these traders are confident, we should be very, very worried that the market is about to decline.
When the Dumb Money Confidence is at 0%, then from a contrary perspective we should be [buying stocks], expecting these traders to be wrong again and the market to rally.
Jason's "confidence indexes" are built based on real money – what real traders are actually doing.
In mid-July, the "Dumb Money" (essentially small traders) was remarkably scared. Jason's Dumb Money Confidence Index dropped to 17%. Readings this low are incredibly uncommon. Meanwhile, Smart Money Confidence stood at 67% – a whopping 50-point spread.
Whenever this spread hits 50 points, history says you have a 95% chance of making money over the next three months... with an average gain of 13%.
In general, I've found sentiment indicators are difficult to use as timing indicators. The results look good. But as they say, past performance is no guarantee of future results. It's better to use a sentiment indicator like this one from Jason as a "get ready to buy" or "get ready to sell" indicator.
Still, the timing this month wasn't bad... The indicator flashed on July 10, and the market appears to have bottomed just three trading days later, on July 15. Since then, the market has spent the last two weeks fighting its way into an uptrend. So far, the "up" move has been so weak, we can hardly call it an uptrend yet. But it's trying.
Actually, when you step back and size things up, we're very close to an ideal situation for making money in stocks:
1) Stocks are relatively cheap now... For example, the forward price-to-earnings ratio of the Dow is only 12.5 today.
2) Investors are scared, as Jason's Dumb Money Confidence Index shows.
3) We're just missing the uptrend.
But the market is trying... And Jason's indicator has a formidable track record. In short, we could be close to a great time to buy U.S. stocks.
Good investing,
Steve
P.S. Learn more about what Jason's up to at www.sentimentrader.com.
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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