I'll let you know about AAII later today, Sam. You asked about put/call ratios. I've never studied them or done any backtesting on them. But I did notice that in IBD you can find them on the page with all the big market index charts, in a little table called 'psychological market indicators,' which also reports a sentiment survey. It does give some 12 mo and 5 year hi-low results for these indicators, which serves as a crude backtest.
I noticed that the put/call volume ratio hit a 12 mo. high of 1.06 back in July 16, which was pretty much at the market bottom. So for that one correction anyway, that ratio looks like it predicted the bottom just right. The 12 mo low in put/call came in at 0.38 on December 1996, which was a couple of months early as a sell indicator.
So over the last 12 mos, it looks like put/call volume ratio worked perfectly for calling the bottom of a correction but called the peak 2 months prematurely. More backtesting than that would surely be helpful before making serious decisions based on it, I would think.
Another indicator in this table is the ratio of the price premiums in puts vs. calls. Over the last 12 mos., this has been very timely in predicting market tops and bottoms, although I have to say I don't know what fundamental principle underlies this, as it works oppositely to the put/call ratio, so it is not directly related to investor sentiment. The 12 mo. peak was 1.55 on 2/18, and the 12 mo. low was 0.29 on 7/15/96, corresponding to market tops and bottoms, very nicely. Can anybody explain the fundamentals of why this premium ratio works, or whether the last 12 mos. was just a fluke?
Looking at the 'investment advisors' sentiment index in the table, it looks like it too showed a bullish peak in December 96, sooner than the market peaked, although its bearish sentiment hit a bottom in early February 1997, which was nicely timed with the market peak. I assume that the 'investor advisors' survey allows respondents a third choice of neutral, as the AAII survey does -- otherwise the bulls would peak at exactly the same time the bears hit their nadir and vice versa.
My subscription to IBD expired on Monday (I 'bought' it for a few months using airline frequent flyer miles that were about to expire).
If anybody here gets IBD, if you want to watch the psychological indicators table, and tell us if you see the put/call ratios or the 'investment advisors' survey approach their 12-mo extremes, that might be helpful. |
