Last Updated on October 22, 2022 by Oddmund Groette
The Investors Intelligence Index is becoming widely accepted as a means of estimating the balance between the bulls and bears. But what does it actually mean?
Also known as the Advisor Sentiment, Investors Intelligence Sentiment Index is based on contrarian propositions, which suggest equity traders should act opposite to the balance of expert opinion and market trends.
What is the Investors Intelligence Sentiment Index?
The Investors Intelligence Sentiment Index is based on contrarian propositions, which suggest equity traders should act opposite to the balance of expert opinion and market trends. The indicator surveys over a hundred independent market newsletters and assesses each author’s current stance on the market — bullish, bearish, or correction.
It takes a weekly poll of investment advisors and produces three numbers: the percentage of investment advisors that are bullish, the percentage that is bearish, and those that are expecting a market correction.
The report also shows weekly figures that measure the number of stocks that are above their 10-week and 30-week moving averages. The 10-week readings are useful for measuring short to intermediate market turns, while the 30-week readings are more useful for measuring major market turns.
This survey has been widely adopted by the investment community as a contrarian indicator and is followed closely by the financial media. Since its inception in 1963, the indicator has had a consistent record for predicting major market turning points. For more than six decades, the indicator has been reasonably consistent, and its current readings are put into context against historic precedents.
When the survey was first developed, it was expected to indicate the best time to be long as the time when most advisors were bullish. But it turned out that a majority of advisors and commentators were almost always wrong at market turning points. So, the investing community started using it as a contrarian indicator.
Who invented the Investors Intelligence Sentiment Index?
The investor intelligence survey was developed by AW Cohen. At the time he invented the report, he expected that the best time to be long the market was when most investment advisors were bullish, but it turned out that wasn’t the case, as a majority of advisors and commentators were almost always wrong at market turning points. Now, the investment community uses the report as a contrarian indicator when the values are extreme.
History of the Investors Intelligence Sentiment Index
Investors Intelligence was created in 1963. It is one of the longest-standing providers of technical research in the world and has been in operation for over 50 years. The report has been widely adopted by the investment community as a contrarian indicator and is followed closely by the financial media.
The mission has always been to generate consistently valuable, clear, unambiguous, and accurate investment research. Although initially intended to provide direct recommendations on bullish and bearish sentiments, the investment community now uses it as a contrarian indicator, especially at extreme values.
What is a good or bad Investors Intelligence Sentiment reading?
When bullish readings are over 55%, it indicates too much optimism and is potentially negative for the market.
Readings below 35% reflect too much pessimism and are considered positive for the market. This survey has been widely adopted by the investment community as a contrarian indicator when at extreme values.
If you use weekly figures, then those figures can be used to show overbought and oversold market conditions — readings above 70% suggest an overbought stock market, while readings below 30% suggest an oversold market. The actual signal of a potential change in trend takes place when the numbers rise back above 30 or fall back below 70.
However, you need to backtest yourself. We rarely publish anything that is not backtested, but we make an exception with this indicator: we are too greedy to pay the fee for the data, so we leave any backtest to you.
What is meant by investor sentiment?
Investor sentiment generally refers to the mood of investors about the market. Analysts may estimate investor sentiment by reviewing the trading activity and direction of prices within a particular market. For instance, rising prices might indicate positive investor sentiment, while falling prices may indicate negative sentiment.
However, most of the time, they use certain indicators to estimate the mood of the market. Unlike technical indicators that study individual securities, sentiment analysis focuses on the broad market. Investors Intelligence Sentiment Index is one of the indicators that can be used to gauge the mood of investors.
What is the difference between AAII and Investors Intelligence Sentiment Index?
The AAII Sentiment Survey focuses on the opinions of individual investors by asking them their thoughts on where the market is heading in the next six months. The index has been around since 1987. This market sentiment data is compiled by the American Association of Individual Investors (AAII).
The Investors Intelligence Sentiment Index, on the other hand, focuses on investment advisors and commentators, which are supposed to be professional analysts and traders.
How and where do I find Investors Sentiment Index?
You find investor sentiment indicators on the website of the company that publishes it. Companies such as Chartcraft publish sentiment indexes that provide investors with a running measurement of market conditions. The Investors Intelligence sentiment index is one of the sentiment indicators published by Chartcraft. You can find it on its website, where you can subscribe to the plan you want.