Contrary to the Investor

Wall Street is a world of statistics. One of my criticisms of all the number crunching has always been that there is no way to quantify emotions. Fear and greed, as many are aware, play a large part in any financial decisions, especially when it involves risk.

One of the more popular data points is something called “Investor Sentiment”. This is a poll that attempts to determine whether individual investors are bullish or bearish on the stock market.

Here’s the interesting part of the Investor Sentiment reading. It is referred to as a contrarian indicator. All this mean is that the opposite of the reading is typically the case to follow. If individual investors are bullish, or greedy, on the market, that is taken as a negative indicator. If they are bearish, or fearful, then it is taken as a positive indicator for the markets.

Now, why would the opinion of individual investors not be considered a gauge of the future? It’s rather simple. The term “dumb money” isn’t used as much as it once was but it refers to the general public. They are not dumb, per se. They simply don’t have access to the information, resources and expertise that others may. The average investor is considered to be wrong about the general direction of stock prices.