New Single Day High in ISEE Equities Only Index on Monday

Lost in all the hoopla over the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) was a historic event in the options and market sentiment world on Monday: a new single day high in the ISEE equities only call to put ratio.

To recap for those who may not be familiar with the ISEE, this ratio was developed by the International Securities Exchange (ISE) and is calculated by dividing opening long call options bought by ISE customers by opening long put options bought by ISE customers, then multiplied by 100. The ‘equities only’ slice of the full transaction pie means that all trades with indices and ETPs are excluded from this data, which also reduces the likelihood that any of the ISEE equities only data includes trades intended largely as portfolio hedges.

Monday’s record close of 410 means the ISE customers were buying four times as many calls as puts. Because there tends to be a lot of noise in the daily data, I like to average the data over a 10-day period. The chart below shows the ISEE equities only index since July 2011, along with the 10-day moving average.

Generally, put to call data is considered to be a contrarian indicator that flags when the masses are becoming overly exuberant or fearful and on Monday at least, exuberance – rational or otherwise – was running rampant, perhaps over the excitement of growing evidence of possible QE3 activity and a Bernanke put in general.

For what it is worth, the prior single day high in the ISEE equities only index dates from December 2010, when stocks were in the middle of a six-month bull move that resembles the current move in several respects and carried the SPX from 1039 to 1344.

Related posts:

• Yesterday’s Unusually Low ISEE Equity Number
• Checking for Athiests
• Equity Put to Call Ratio Hits Ten Month Low
• Chart of the Week: Total Put to Call Ratio
• CBOE Equity Put to Call Ratio Poised to Print Warning
• A First Look at the ISEE
• A Sentiment Primer

[source(s): International Securities Exchange]

Disclosure(s): short TVIX at time of writing

Hope and Depression in the Investor Sentiment Cycle

Charles Kirk of The Kirk Report has an interesting post up, The Investor Sentiment Cycle, in which analyzes the results of a recent survey he conducted in which he asked a broad group of professional investors to indicate where they believe investors are in the sentiment cycle, a graphic of which is at the bottom of this post.

I am not sure of the exact origin of the Investor Sentiment Cycle, though it was attributed to a graphic from 1998 by Westcore Funds by several sources. My guess is that the chart evolved from a similar graphic from Justin Mamis, which appeared in The Nature of Risk, published in 1991.

Given my recent discussion of the record highs in my proprietary VIX Futures Contango Index, extreme readings in the AAII Investor Sentiment survey (in the newsletter), records highs in the price of gold, record low Treasury yields, surging prices for default insurance for European credit defaults swaps (CDS), etc. it is not surprising that the #2 response to the Kirk survey was that investors are going through a period of depression. On the other hand, the S&P 500 index is now 69% above its March 2009 low, which is part of the reason that the #1 response to the survey was that investor sentiment is currently characterized primarily by hope.

While depression and hope are adjacent in the sentiment cycle, the distinction in an investor’s psyche is an enormous one. With depression, there is a concern that current conditions will likely not improve and that investment opportunities carry more risk than reward. More importantly, the is such an anxiety about the future that investors worry that about the potential for markets to deteriorate to previous low levels and perhaps even get worse than they were in 2008.

Just around the corner from depression is hope, where the outlook is still mostly cloudy with a chance of sun, but there is a widespread belief (perhaps partly wishful thinking, but grounded in some tangible signs of progress) that the bottom is behind us and continued improvements are more likely than not.

Given much of the data I have seen and written about, I believe investors are still operating under the long shadow of 2008 (and beyond), with the result that their psyche is still under the influence of ‘disaster imprinting.’ In terms of the sentiment cycle, this puts them in the depression stage. My personal perspective closer to hope than depression at this point. I understand that hope is a concept that traders should avoid, but I do think that even with all the challenges to the global economy, hope is a more appropriate place to look for investment opportunities.

When the VIX is at 22 and I can sell VIX futures (or options based on those futures) at 32, at least I have the comfort of knowing that I have a large margin of error before I have to worry about some of my trading ideas becoming unprofitable.

Related posts:

• Will Market Volatility Return to Crisis Levels? (Barron’s)
• VIX Futures: What Were/Are They Thinking?
• VIX Futures Contango Soars
• More Strange Happenings in the VIX Term Structure
• Today’s Jump in the VIX Futures Term Structure
• Availability Bias and Disaster Imprinting
• Checking for Athiests
  
  

Disclosure(s): neutral position in VIX via options at time of writing

Sequencing Stocks, Jobs and GDP in a Rebound

Sometimes my ability to overlook the obvious amazes me – and I’m not talking just about my trading.

I should have known I was overlooking something important when several of the recent Abnormal Returns (almost) daily links referenced a blog by the name of Sentiment’s Edge. With Jason Goepfert at SentimenTrader and Brent Leonard at Market Sentiment all over that space, I wondered to myself what need was there for a new entrant in the market sentiment space. As it turns out, Jason Goepfert, who runs the subscription-only SentimenTrader, started a free blog back in January: Sentiment’s Edge. Perhaps it took a sub-35 VIX for me to get my perceptual edge back.

In any event, as a subscriber to SentimenTrader (and I very rarely subscribe to anything), I am delighted to see that Jason is putting more of his thinking out in the public domain. As a rule, VIX and More generally focuses on free content and does not comment on content that is available only via a paid subscription.

If you have never been to Sentiment’s Edge, today is a good day to get a sense of the type of analysis you can expect to find here. In The Economy Vs. the Market, Jason draws upon work from The Pragmatic Capitalist to analyze turning points in stocks, joblessness and GDP. His conclusion? Prior to the dot com crash earlier in the decade, the typical pattern was for stocks to lead, jobless claims to follow and GDP to turn last. Follow the click and the graphics tell the story.

Clearly stocks have made a turn, if not the turn. The trend in initial jobless claims are a little murkier, but if today’s ADP employment numbers are confirmed by tomorrows jobless claims data and perhaps Friday’s employment report, then the old pattern may be returning, with only GDP left to reverse.

Frankly, I probably won’t start to be convinced about an economic turnaround until I see more than a month’s worth of progress on the initial jobless claims data, as well as some evidence that there are improvements in continuing jobless claims as well.

Sports, Emotions and Trading

When I wake up each morning, I take a drink from the blogosphere news fire hose in order to get caught up with what is going on in the world and to get a sense of how some learned minds are thinking about these and other developments. I find this process puts a lot of random ideas in front of me in a short period of time and often leads to some interesting juxtapositions that help stimulate my own thinking.

This morning had just one of those juxtapositions. First, in Olympics and Stocks Don’t Mix, Mark Hulbert cites the work of Edmans, Garcia, and Norli (“Sports Sentiment and Stock Returns”) which shows how World Cup soccer losses translate into significantly poorer performance in the local stock market the next day.

Hulbert weaves this research into his own observation:

“In my experience, few investors even recognize the role that their emotions play in their decision-making. When challenged, they are able to point to a litany of reasons, all well documented, for why their strategy is strongly based on a sound statistical foundation. But, most of the time, I still don't believe them.

That's because there are different types of reasons. On the one hand, there are the reasons that genuinely account for why we have decided to do something. And, on the other hand, there are the reasons that we turn to, after a decision has been made, to justify it to ourselves and others. Most of the investment reasons that I hear or read about are of the latter variety.“

Right after Mark Hulbert, I stumbled onto Brett Steenbarger’s A Dozen Thoughts on Trading Stress and Emotion. Frankly, I don’t recall ever having seen a short list that has so much for traders to chew on in the realm of “Know Thyself.”

There are many ways to look at the markets and how you interact with them, but one should never underestimate the emotional component on both sides of that equation.

The Three-Legged Stool

The issue of whether to rely primarily on fundamental or technical analysis is one that each investor has to struggle with, usually a number of times over the course of his or her investing lifetime.

While the relative merits of the two approaches will appeal to different types of investors, I find it hard to believe that the high court of investment strategy will ever rule in favor of one approach at the expense of the other.

None of this stopped Felix Salmon of Portfolio.com from launching an attack on technical analysis in Monday’s Adventures in Technical Analysis, Jim Cramer Edition. After giving Cramer a well-deserved lambasting, Salmon makes the jump from the particular to the general case:

“…Stock traders don't know anything.

It's not just Cramer, is the point. They all do it: even much smarter and much more analytical traders like Barry Ritholtz do it too. Do what? Resort to ‘technical analysis’, which is the art of drawing lines on charts and extrapolating from them what the market is going to do next.

Whenever you hear words like ‘overbought’ or ‘oversold’ or ‘momentum’ or ‘support’ or ‘resistance’, it means that whatever you're hearing is garbage. But it also means that the person you're listening to has no idea what's about to happen, and is therefore resorting to the financial equivalent of astrology.”

For starters, I would consider Cramer to be more of a fundamental guy than a technical analyst, but that is not the important point. Interestingly, to my thinking, Barry Ritholtz spends as much time as anyone writing about macroeconomic and fundamental issues, but this apparently escaped Salmon’s notice as well.

Ritholtz’s succinct response, which can be found in its entirety in Let’s Get Technical, includes a reframing of the question and a quick summary of some of the merits of technical analysis:

A better question to ask is "What information do charts and related data provide, and how can this be used by investors and traders?"

I posit that, when used appropriately, charts and data can provide tremendous insight:

- Provides a statistical approach to investing, one that describes the probabilities of various outcomes (versus making predictions)
- Charts show you if we are in a bull or bear market, allowing you to manage risk appropriately;
- Trends can keep you away from the wrong sectors (Housing, Autos, and Finance are obvious examples) or keep you in the right sectors (eg., Energy and Ag)
- Developing good risk/reward analyses;
- Tracking what the institutions are doing;
- Identifying specific stocks that might be appealing;

The bottom line is that TA is merely a tool, albeit one used more skillfully by some than others.

Finally, consider this question: If you could look at one and only one source before buying your next stock or fund, which would you choose: a fundamental analyst's report (with no charts in it), or any chart of your choosing? While I like having access to both, I cannot ever imagine buying something without first looking at the chart …”

There are many examples of investors who have been very successful investing exclusively with a fundamental approach – and I’m sure there are at least as many investors who have prospered mightily using only technical analysis. Part of the reason investors gravitate to one approach or the other is that it fits their personality and provides a certain level of comfort.

To my thinking, the most important determinant of whether to focus on fundamentals or technical analysis is one’s investment time horizon. In a nutshell, the shorter the time horizon, the more important technical analysis becomes. Find me a day trader, for instance, that invests primarily based on fundamental factors. One the flip side, find me a chartist who is looking at monthly charts covering more than a decade who does not think it is important to be educated on some of the relevant fundamentals that are driving the long-term price action.

Personally, I like to think of my trading style as marrying roughly equal parts of technical analysis and analysis of market sentiment (which I consider to be tangential to TA), informed by a broad view of stock and industry fundamentals, in the context of a larger macroeconomic environment and interrelated global markets. Ultimately, it’s a three-legged stool, with TA, market sentiment, and fundamental analysis providing a balanced perspective.

Finally, I have received a number of comments in which readers have expressed surprise that my subscriber newsletter covers a much broader range of topics than is generally touched upon in the blog. The reasons for this are simple. All the talking heads talk about macroeconomics and fundamentals all day long. There are also a number of blogs and other web sites that spend a lot of time analyzing charts and other TA data. I choose to focus on market sentiment on the blog because I don’t believe this subject gets nearly the attention it deserves. Those who understand volatility, put to call ratios, market breadth data, and other related subjects and who can combine that information with a fundamental + technical approach have a much greater chance of success than those who ignore market sentiment.

In the subscriber newsletter, I utilize a holistic approach to the markets and incorporate a broad range of themes, because I believe it is important to see the whole playing field and not to have any investing blind spots. The approach seems to be working, as I have a 98% renewal rate and am in the process of writing a book on the subject, slated to be published by Wiley Trading in the first half of 2009.

Keep an Eye on the QID Volume

The week’s trading volume has been on the thin side, particularly for an options expiration week. Of course, not all volume is created equal.

One the areas of the investment world where I pay close attention to volume is double inverse ETFs, which include the UltraShort ETFs pioneered by ProShares. The double inverse ETFs are an attractive set of investment vehicles for speculative bears to place their bets, because the oversized payoff if they are correct.

Of the double inverse ETFs, I am particularly fond of the QID, the double inverse ETF for the NASDAQ-100 index (NDX). The QID has captured the imagination of many retail investors who are not particularly comfortable going short, but have no qualms about making a bearish investment by going long an inverse ETF. Volume patterns in this ETF demonstrate that the QID can be an effective contrarian indicator. Take the chart below, for example, where a 5 day EMA of the volume has been a good indicator of tops in the NDX (the gray area chart on the top) when it rises above the 45-50 million share level.

In a broader sense, ETFs are opening up a new frontier for those who are interested in market sentiment. I will be sharing some of my thinking in this area in the weeks and months ahead.

Sticky Sentiment

Back in February I received a lot of positive feedback for a post titled Intrade Prediction Markets as a Sentiment Indicator which discussed the usefulness of prediction markets as a gauge of investor sentiment. This is a theme I will come back to in due course, but for now I wanted to highlight some excellent complementary work in this area.

Expanding on prediction markets as sentiment indicator theme and drawing an interesting parallel in the sports world, Jeff Miller at A Dash of Insight has a superb post up today in which he looks at the ebb and flow of the North Carolina vs. Kansas game as a case study in investor sentiment. In Sentiment Is Slow to Change: A Basketball Lesson, Part One, Jeff uses a real-time chart of the price of the futures contract for the game from Intrade’s sister site, TradeSports.com and provides a thought-provoking analysis of the changing fortunes during the game and the betting response in the futures contract. I highly recommend that readers click over for the full story, but I have taken the liberty of posting Jeff's conclusion below:

“The lesson here is that market sentiment is very ‘sticky.’ Those investing in UNC futures were not just fans. Most were regular players of many sporting events, seeking a profit on this one. They began with an opinion, and the opinion was slow to shift.

The value of looking at an example like this is that the entire picture of sentiment and reality can be captured in the space of a few hours.

In the stock market, a similar process may take many months or even years. We shall explore this further.”

I am certainly looking forward to the next installment in this series.

Bullish TRIN as Year Winds Down

One indicator that I have yet to comment on in 2007 is the TRIN, also known as the Arms Index, after its inventor, Dick Arms.

The TRIN is calculated by first dividing the number of stocks that advanced in price by the number of stocks that declined in price to determine the Advance/Decline Ratio. Next, the volume of advancing stocks is divided by the volume of declining stocks to determine the Upside/Downside Ratio. Finally, the Advance/Decline Ratio is divided by the Upside/Downside Ratio. In mathematical terms, the TRIN looks like:

(Advancing Issues / Declining Issues)

────────────────────────────

(Advancing Volume / Declining Volume)

Like the VIX and put to call ratios, the TRIN is a contrarian sentiment indicator. Generally, a rising TRIN indicates increasing bearish sentiment and a falling TRIN reflects increasing bullish sentiment. I have included the traditional 1.2 and 0.8 thresholds as indicative of sentiment extremes. These are levels at which the probability of a market reversal increases.

Depending on their trading time frame, practitioners use different bars for the TRIN. In the chart below, I chose to use 60 minute bars over the course of a two month period to generate swing signals of the short to intermediate-term variety. For comparison purposes, day traders frequently use 5 or 10 minute bars. It is important to note that different length bars give very different signals and also usually require a rethinking of where one should place the threshold levels for market turns.

At the moment, the TRIN is generating a fairly bullish signal – certainly the most bullish signal since Thanksgiving, when the markets began a strong rally that surprised many who were not watching the TRIN closely.

I will have more on the TRIN in 2008.

New Blog/Site Recommendation: Index Indicators

It is rare that I go out of my way to devote an entire post to a particular blog or web site, but in the case of IndexIndicators.com this type of attention seems warranted, even though the web site is only in the second week of its life.

First things first, a tip of the hat to Headline Charts, which is already incorporating some Index Indicators charts into the site's weekly Friday Market Sentiment report, which should be a mandatory stop for brushing up on the latest in various market sentiment surveys and related data.

Of particular interest to VIX and More readers will likely be the Index Indicators market commentary blog and the wide variety of charts they provide for breadth indicators, put to call ratio indicators and volatility indicators.

Charts are of the end of day variety, range from three months to three years, and include the following information:

• Breadth indicators – % of stocks above their 5, 10, 20, 50 and 200 day SMAs; also % of stocks whose 5, 10, 14, and 21 day RSIs are above 70 or below 30
  
  
• Put to call ratio indicators – the 5, 10 and 20 day SMAs for the CBOE equity, index and total put to call ratios
  
  
• Volatility indicators – the 5, 10, 20, 50 and 200 day SMAs for the VIX, VXO and VXN, plus the current level of each of these indices relative to these SMAs (see below for one such chart)

In sum, this new site is an excellent source for data and charts on three subjects that are central to my trading and to the blog as well. For this reason, I have also added IndexIndicators.com to the “VIX & Sentiment Links” in the upper right hand section of the blog.

ISEE Highlights Froth

Just in case it is not already obvious to anyone who may be an occasional reader, the VIX and the ISEE are my two favorite measures of market sentiment.

Right now the VIX is suggesting that the current market environment is overheated. This is evident in measures such as the distance the VIX is below various moving averages, the VWSI, and the VIX:SDS ratio.

Until recently, the ISEE was a little more prone to fence-sitting, but that changed with yesterday’s 187 reading, the highest single day reading since August 2006. On the heels of that large number comes a wave of call buying this morning that has the ISEE at 270 as of 11:10 EDT. Now it is not unusual to see extreme readings in the ISEE early in the day, when the denominator is low, but what is unusual is to see those extreme readings get even more extreme as the day wears on, such as the ISEE actually jumping up from 257 to 270 during the last 40 minutes. This development bears watching…

A Baker’s Dozen of Favorite Indicators

In my previous life, when I favored the currency of frequent flier miles over the Dow Jones Transportation Average itself, I used to spend a lot of time consulting in the area of business strategy development. During this period, much of my energy was focused on the creation of strategic objectives and a corresponding set of metrics that would help to determine how well those objectives were being met and how likely the were to be achieved in the coming quarters. The work was a roughly even mixture of art and science that attempted to capture the complexity of a business, yet reduce it to about 12-15 metrics. Experience proved that less than a dozen or so metrics invariably meant that important components of the strategic plan would fall through the cracks, while more than 15 metrics usually translated into a management team that was not properly focused and thinking about strategic priorities.

Investing, it turns out, is not much different. To the extent that you can keep things simple and have an uncluttered cockpit that still tells you everything you need to know to make it from point A to point B, you increase your chances of success.

Last week, a reader asked what my favorite market indicators are and it got me to thinking how I should be able to trade with only 12-15 indicators instead of the 25-30 that it seems I am always trying to pay attention to.

So…here is my attempt at spelling out a baker’s dozen of indicators that I would use if I were restricted to just this number:

General Market Overview:

• S&P 500 Index – with the standard 20/50/200 day SMAs
• NASDAQ Composite Index – with the standard 20/50/200 day SMAs

Market Breadth Indicators:

• McClellan Summation Index – my favorite of the advance-decline indicators
• New Highs Minus New Lows – I do a lot of work with individual stocks making new highs and like the way the 52 week high-low data complements the daily advance-decline data

Market Sentiment Indicators:

• ISEE – with a number of SMAs, including the 50 day SMA
• VIX – particularly the graph with the 10 day SMA combined with the 10% and 20% envelopes
• VWSI (VIX Weekly Sentiment Indicator) – while there is some overlap with the chart noted above, I include this because an increasing amount of my trading is driven by the VIX

Internal Market Trends / Speculative Behavior:

• Small Cap vs. Large Cap ratio – I tend to favor the RUT:OEX
• Emerging Markets vs. Developed Markets – while it hasn’t provided much in the way of exciting information as of late, I use the EEM:EFA

Three “Indicator Species” of Sorts:

• Oil – I prefer to watch the commodity, West Texas Intermediate Crude, but I also watch some of the ETFs closely
• Gold – again, I go with the commodity instead of various indices and ETFs
• The Long Bond – here I prefer TLT, the ETF for the 20 year Treasury, as I find it easiest to trade

And to Make it a Baker’s Dozen:

• Sector and Regional Strength Indicator – there are many ways to do this, but I like to sort ETFs by strength, as can be done on ETFScreen.com

Since I use Firefox, Flock and IE during the trading day, what I like to do is load all of the above indicators into tabs for my Opera start-up session, so that I can pop them open all at once just by starting Opera.

In the real world, I will likely find it difficult to wean myself away from all the other indicators that I use, but at a very minimum I urge all to prioritize their top dozen or so indicators and come up with some ideas about which ones to lean on most heavily when they are providing conflicting information and/or the markets are most volatile.

Did We Dive Deep Enough?

After five weeks of increased volatility and a pullback in the S&P 500 that topped out at 6.7%, the question everyone is asking is whether the 6.7% drop was enough to wring out the excesses of the bull market and provide a wall of worry for further advances…or whether a nastier bear ambush lies just around the corner.

In a Sentiment Primer (Long), I did not spell out which scenario the sentiment indicators are pointing to, but if you read my comments on the ISEE the previous day, you know that the case for a resumption of the bull market is strong.

One group of indicators that I purposely left out of my sentiment primer is variously know as market internals, momentum, strength, etc. These include market breadth (advance-decline lines) data, the number of new highs and lows, and the percentage of a group of stocks trading above certain moving averages, among others. I will talk about these indicators in more detail in a future post, but for today I merely wish to update a chart I first posted and discussed here two weeks ago: a ratio chart of the new highs in the NYSE to the VIX.

The current version of the chart, appended below, shows the full extent of the effect on the ratio during the market pullback, in which a small “W” formed in the SPX. By the standards of the past four years, the drop in the ratio was relatively mild compared to other drops, including the May-July 2006 correction. This is partly due to the dramatic spike in the VIX, as we have discussed here ad nauseum, but also a function of the persistence of new highs in the NYSE, as recently noted by Headline Charts.

For the last three years, the 52 week average (not plotted) for the NYSE new high to VIX ratio has held steady in the 10-14 range. As current readings approach this range, the likelihood of the markets running into another bear ambush and bout of echo volatility is slowly receding.

(click to enlarge)

A Sentiment Primer (Long)

A reader asked about how to get up and running with sentiment indicators, where to get data, what time frames to use, etc. Since this is not a subject I have broached here, let me use this opportunity to provide an initial overview of some of my thoughts on sentiment indicators.

In terms of context, I consider fundamental analysis, technical analysis and market sentiment analysis to be the three primary legs of the investment stool. I believe it is a common pattern for relative newcomers to the investing world to begin with a fundamental analysis perspective, start wondering why individual stock don’t move ‘like they should,’ then add some technical analysis tools. Often it takes awhile to get the hang of TA; once they do, most investors get blindsided when thee entire forest moves abruptly while they are focusing on an individual tree or two. This is often the catalyst that leads to a more in-depth examination of market sentiment indicators.

Sentiment as a Contrarian Indicator

With that out of the way, where should you start with investor sentiment? First, keep in mind that much of market sentiment is a contrarian tool. One of my favorite quotes comes from John Bender in Jack Schwager’s Stock Market Wizards, “It’s not the current opinion on the stock that matters, but rather the potential change in the opinion that matters.” When your great aunt, housekeeper and taxi driver all start telling you how much money they are making in the stock market, who is left to buy and drive prices up further? On the other hand, if most of the people you know confess to having recently lost over half of their money in the market and swear about “never investing in stocks again,” then the markets have probably just about run out of sellers.

By all means, keep tabs of anecdotal evidence from novice investors you know and consider how much easy money you could make by taking the other side of every trade that a novice investor makes.

Types of Sentiment Indicators

In a nutshell, sentiment indicators attempt to discern what unsophisticated investors are thinking, feeling and doing, then encourage you to take the opposite position when their fear or greed reaches extreme levels.

Some sentiment indicators are compiled based on a direct survey of investors to determine if they are bullish or bearish. Three of the more famous of these are Investors Intelligence, the American Association of Individual Investors (AAII) and Market Vane. Newer additions to the fold are Birinyi’s Blogger Sentiment Poll and LowRisk.com’s Investor Sentiment Indicator. Since we know that what some people say and actually do are often two very different things, much of sentiment analysis looks at the activity of supposedly unsophisticated investors in order to get a better sense of which direction they are leaning. The ISEE (call to put ratio) is one such measure of investor activity; the CBOE Equity put to call ratio is another; and the Public Short Sales data is another good data point. To the extent you are able to, use ratios and other tools to compare and contrast the actions of the ‘little guy’ with that of institutions.

Sentiment Data Sources

In terms of sources, StockCharts.com has a great (and free) Market Summary page that is an excellent snapshot of what is going on in the 100+ most important markets, sectors, countries, etc. Scroll down to the bottom two groups and you'll find many sentiment indicators I follow in the "Market Breadth" section. You may or may not already be familiar with the "Bullish Percent Indices" – if you aren't, these are something you should take some time to educate yourself on in the future. Each indicator has links to three kinds of charts – and if you click directly on the name of the indicator, you will pull up the default gallery view.

Another excellent free site with a different set of indicators can be found at Market Gauge - Today's Indicators. I keep an eye on the “Contrary Opinion” data, in particular. Note that each line has a chart link in the far right hand side of the page. You may want to also bookmark Market Gauge's Market Summary page. Finally, I only recently discovered InvestmentTools.com, which has some superb “Weekly Sentiment Indicators” as well as some valuable “Short Sales” data.

Two other recommended sources for market sentiment are Market Harmonics (consider the "Volume" and "Momentum" data at some point in the future too) and the "Power Tools" at SchaeffersResearch.com. Once again, start with the “Sentiment Data” section, but eventually look at the others as well. In terms of blog sources, HeadlineCharts probably does more with market sentiment than any of the others I read and TheSentimentals.com has as comprehensive a list of links to market sentiment data as I have seen. For a weekly recap of sentiment data and a commentary on what is happening in the world of sentiment and market internals, check out Fred Ruffy's "Sentiment Journal" column at Optionetics.com.

Whenever possible, I suggest you get data directly from the exchanges, such as ISEE data from the ISE and CBOE VIX data and CBOE Put/Call ratio data from the CBOE. You can download historical data from Yahoo in spreadsheet format for the likes of the VIX and many other indices. As a rule, you should try to get this same data from an exchange or web site dedicated to this index first and use Yahoo only as a last resort.

Sentiment and Time Frames

Regarding time frames, your typical holding period should dictate the time frames you look at. Are most of your trades day trades? swing trades of 2-10 days? have holding periods of 1-3 months? Maybe you trade in multiple time frames (dangerous and confusing at times, but ultimately not necessarily a bad thing to do.)

I have never seen anyone articulate this, but my personal experience is that the charting time horizon for support, resistance, moving averages, recognition of common patterns, etc. ought to be something on the order of 20-50x your typical holding period. Most of my trades are of the 2-10 day variety, so most of the charts I look at are in the 20 day to 1 year range. I like to look at charts of 2 years or more for historical perspective on candidates I have already screened and I sometimes to go down as low as 1 minute bars for intra-day charts to fine tune entries and exits, but for the most part, I live in the 1-6 month charting world. Typically the longer term charts identify the opportunity and the shorter term charts trigger the timing of the entry.

I rarely care much about intra-day sentiment and look at a lot of moving averages in the 5, 10 and 20 day range, sometimes up to 200 days/40 weeks. Your sentiment time horizon should probably match your overall charting time horizon, but I haven't found much bang for my energy/attention buck focusing on intra-day or even day to day sentiment movement. Look for some smoothing factor, such as simple or exponential moving averages, to help minimize the noise.

On-Line Resources and Books

Regarding books and other educational sources, I can't say I have any great ones up my sleeve.

As noted earlier, for an on-line source, StockCharts.com does as good a job as anyone in terms of education. I would definitely start with their Introduction to Market Indicators and go from there, perhaps backing up to their entire Chart School series. You should probably bookmark their Glossary for future reference too.

For a broad brush perspective on sentiment indicators, I highly recommend that you check out an excellent post by Barry Ritholtz of The Big Picture, "Contrary Indicators 2000 - 2003 Bear." You should also download the full PDF or Word document that he links to and study the analysis of various internal and external indicators, then look at some of these and how they performed in and around May-July 2006 as well as around February 2007 – or any other period you are interested in.

If you want a treasure trove of ideas on sentiment, I heartily recommend a visit to TraderFeed.com, where a keyword search on "sentiment" will provide you with many hours of reading from the archives of Brett Steenbarger. If this is news to you, then you just aren't paying attention...

I am embarrassed to admit that I have not yet bothered with the free trial of Jason Goepfert's SentimenTrader.com, but from what I have seen of his work, I would recommend you test drive his site with a free trial. At a minimum, follow the link above to see what sort of indicators he thinks are worth following.

The last time I did a summary of recommended investment books was about 9 months ago. I need to update that list and put it on the blog, but I can tell you that there is not a great book on investor sentiment in there. Gary Smith’s How I Trade for a Living is probably my favorite treatment of market sentiment. Though it is not on the above list, I thought Toni Turner did an excellent job with sentiment and many other topics in Short-Term Trading in the New Stock Market. For my money, Turner’s book is one of the better ones for a relative newbie, albeit with a definite short-term bias. Two other books worth checking out for their discussion of sentiment issues are Martin Pring's encyclopedic Technical Analysis Explained: The Successful Investor's Guide to Spotting Investment Trends and Turning Points and New Thinking in Technical Analysis: Trading Models from the Masters, a patchwork of ideas from many respected thinkers, edited by Rick Bensignor, which includes a chapter on sentiment by Bernie Schaeffer, "Enhancing Technical Analysis by Incorporating Sentiment."