Chris Rowe

VIX, Investors Intelligence Data at Odds

by Chris Rowe   08/27/08

If you base your stock and option buying based on when "everyone else" is bullish or bearish, then it's time to shake up your approach to making money in the market.

I say this not to be a contrarian but instead to tell you what I've learned the hard way: When you feel the same way about the market as everybody else around you, then something's wrong.

Personally, I feel ever-so-comfortable when I'm in the minority. This is my happy place.

Now is the time to find yours.

GET AWAY FROM 'GROUPTHINK'

Right now, the bearish camp is mob-deep, holding hands and singing "Kumbaya." I encourage you to get away from all that noise. But what should we be listening to?

There are two main sentiment indicators that I like to watch. One is the Investors Intelligence Advisors' Sentiment indicator, and the other is the well-known CBOE Volatility Index (VIX).

Sentiment indicators are contrary indicators -- if too many investors are bullish, it's a bearish indication, and vice versa.

What's strange is the Advisors' Sentiment Indicator is showing extreme bearishness, which means we are likely close to an intermediate bottom. On the other hand, the VIX is showing a complacent market.

This kind of scenario is confusing to even those traders who've seen pretty much everything. Typically, both indicators are spot-on. Anyone who has used my proprietary Internal Strength System and studied both indicators knows that, 9 out of 10 times, the buy signals (and, in the case of Advisors' Sentiment, sell signals) are right on time.

SO WHAT'S UP WITH THE DISCREPANCY?

Well, let's first speculate on the discrepancy and then talk about what's happening. First, let's consider what each indicator is.

The Advisors' Sentiment Indicator is the result of a poll taken from over 200 newsletter-writers asking whether they are bullish, bearish or in-between somehow.