On March 6, I sent an email entitled “Investor Sentiment Signaling a Bottom?”. As it turned out, March 6 was the absolute bottom of the market, and I attribute my email to luck and not any ability to divine the market. I do think that paying close attention to prevailing sentiment can be helpful in identifying major turns in the market. Investor Sentiment is a funny thing in that people have a tendency to be most bearish at market bottoms- when they should be bullish- and most bullish when the market is screaming- exactly the opposite of how they should be “feeling.” The investment business is one of the few businesses in which people are hesitant to buy when the merchandise is on sale (market bottoms), but are happy to pay full retail when merchandise is fully priced (market tops).

So, how are people feeling right now? Click on the link below or cut and paste it into your browser.
http://www.marketwatch.com/story/investor-sentiment-index-reaches-late-07-levels-2009-08-26?siteid=yhoof

So how does one use Investor Sentiment readings? An  investor’s asset allocation, as defined by his or her Investment Policy Statement (you do have one, don’t you?) is the investment “road map.” Indicators such as Investor Sentiment should be viewed as the accelerator pedal of the automobile- when sentiment is extremely bullish, it may be a good time to ease off the accelerator: i.e. raise a bit of cash, and move towards the more conservative constraints of the Investment Policy Statement- without making major “bets” or entirely throwing away the road map.Because of the huge rally we have enjoyed since the March lows, many portfolios are now overweighted in equities relative to the stated objectives of the Investment Policy Statement. Investor Sentiment readings are saying now may be a good time to be a bit more conservative and be very protective of the down side.

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