Investors Intelligence: Correction data not extreme (Jun 07)
Investors Intelligence produces a weekly survey of 100+ independent newsletters and reports the findings as percentage bullish, bearish, or “correction”. Tom McClellan has a great overview of the lattermost data in this older post. The correction camp is for those abstaining from being bullish or bearish the stockmarket. When the correction data increases rapidly, it shows loss of conviction and increasing uncertainty.
The headline chart above shows the correction data with bands to catch sharp changes in the data. The light blue lower band is the average 52-week correction data. The bright red upper band is 1.5 standard deviations above the average 52-week correction data.
Tom points out that spikes in the data can indicate important market bottoms. As you can can see in the next chart, the data does not always line up with market bottoms in the S&P 500 index. Yet it does seem to overlay periods with a lot of sideways chop and/or dips. The pink areas are periods where the correction data has moved above the upper red band, but has not dropped below the light blue band.
Just as important as marking bottoms, I find that moves in the data also precede or coincide with spikes in the CBOE VIX index, as it indicates better-informed investors are expressing newfound uncertainty.
The following chart is a not a complete trading strategy, but a thought experiment: what if one entered the market when II Correction is below its 52-week average, SPY is in an uptrend (above its 200-day average), and the Wednesday (Investors Intelligence release day) VIX index is above the prior Wednesday VIX index. A lot, but not all, of the excessive drawdown of SPY could have been avoided.
Again, the indicator is not perfect. I plan to review other signals generated by Investors Intelligence (such as changes in the number of bulls & bears), as well as reviewing a combination of signals.
Breaking Away
This is not a perfect indicator to pick bottoms. However, there is always value in paying attention, especially in understanding why something does not work. Note: I am not recommending a trade or trading system here. Trading involves risks, and I have no idea if those risks are right for you!
