The Investors Intelligence Index is a popular and generally acknowledged method of determining the power balance between bulls and bears. In reality, the index might refer to any of a number of different sentiment indicators, such as an advisor sentiment review or an insider activity review. These particular indices are organized into sectors that reflect market players. Continue reading to find out more about this index and how it works.
- The Investors Intelligence Index is a commonly used and acknowledged method of evaluating the power balance between bulls and bears.
- The index was developed in the 1950s and improved upon in the 1960s.
- It is founded on contrarian notions, which argue that equities traders should behave in opposition to expert opinion and market trends.
- Chartcraft defines a ranking system for several indicators, assigning a number rating to each one.
- Extreme bullishness is represented by any number close to -10, whereas extreme bearishness is represented by any number near to +10.
The Investors Intelligence Sentiment Index may not be what it seems to be. Chartcraft really refers to an advisor’s emotion, which is a synthesis of the newsletter authors’ projections. The index is built on contrarian propositions, which are investing techniques that advocate for stock traders to act in opposition to expert opinion and market trends.
Newsletter authors provide unbiased advise based on their articles and opinions. The Investors Intelligence Sentiment Index is derived by studying more than 100 newsletters. The sentiment indicator is based on the assumption that a consensus trend is always ready to reverse. This gives traders the chance to profit from an impending price movement reversal. When the balance of opinion is heavily tilted in one way, the indicators of a reversal are greatest.
The Sentiment Index Ranking
To make the index helpful for traders, the business establishes a ranking system across all of its indicators, assigning a numerical value to each indication, including the sentiment index.
Any rating that reaches -10 indicates extreme bullishness. This suggests that the market’s direction may be changing downward. Extreme bearishness would be any figure close to +10, indicating that the market is poised to turn positive. This indicates that the bulls have taken control.
The negative rankings range from -1, which is awarded when the bulls have 51% or more, to -10, which is assigned when the bulls have more than 60%. This is unique to the sentiment index and is not a general rule for other indices.
If the bulls go below 45%, they get a +1 rating, and if they fall to 36% or below, they receive a maximum reading of +10. If the bears fall below 20%, a -10 rating is assigned, and this ranking stays active for three months. The emotion weighting can only ever have a maximum rating of -20.
Investors Intelligence also provides assessments for more unusual occurrences. If the bears reach 55%, a +10 is applied to the rating for the next six months. This was seen in December 1994. For two weeks in a row, the bulls were up to 59%+, the greatest level of bullishness recorded by the index in 12.5 years.
Your ability to weigh information from many sources and apply the knowledge to your specific objectives and circumstances is critical to the success of your investing plan.
Although the renowned Investors Intelligence index was devised in the 1950s and modified in the 1960s, it was not subjected to a rigorous test until the turn of the twentieth century.
In the years running up to the year 2000, researchers from the University of Santa Clara undertook a study led by Ken Fisher, CEO of Fisher Investments, and Meir Statman, Glenn Klimek professor of finance at Santa Clara. Their research found only a shaky link between the Investors Intelligence Sentiment Index and important market turning events.
“We discovered a negative but not statistically significant association between newsletter writer mood as indicated by the Investors Intelligence poll and future S&P 500 returns.”
Because of this criticism, Investors Intelligence defined the aim of their indicator while also offering an excellent demonstration of what investor sentiment is and isn’t. The mood index, like every other indicator, generally tells you nothing. In reality, most of the time, investor mood is in a normal range, and its neutral reading provides no relevant trading indication. According to Investors Intelligence, there is a usual range of 45% bulls, 35% bears, and 20% correction.
The Bottom Line
Investor mood is typically neutral, although it may sometimes be somewhat too positive or negative. The most important signals, on the other hand, are provided by greater bullish or bearish rankings, as well as less frequent occurrences of key event readings. The Investors Intelligence mood index has a strong link with important events and market performance.
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