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Should You Pay Attention to Investor Sentiment?

If Schwab Chief Investment Strategist Liz Ann Sonders could track just one metric, it would be investor sentiment.

Earnings and the economy are important, to be sure, but in her view the greatest upside lies in knowing when the public is either overly optimistic or unduly pessimistic about the market—a classic selling or buying opportunity.

Liz Ann follows the subscription-only Ned Davis Research Crowd Sentiment Poll and SentimenTrader Smart Money/Dumb Money Confidence Spread, as well as the freely available American Association of Individual Investors’ Investor Sentiment Survey. “When these measures indicate excessive bearishness or bullishness, it’s often time to go the other way,” she says.

For example, Liz Ann observes that the bull market that began in March 2009 has lasted so long in part because it has been the most underappreciated in history. “On a net basis, no new money has flowed into stocks, either through mutual or exchange-traded funds, since the bull market began,” she says. “The primary driver has been companies buying back their own stock.” In other words, investor euphoria hasn’t come along to kill this particular bull run with kindness.

“Investor sentiment isn’t a perfect indicator,” Liz Ann cautions, “but many of the major tops and bottoms in the stock market have occurred at its extremes.”

The bottom line: When investor sentiment is excessively bearish or bullish, it can sometimes signal that the market is about to turn.

What You Can Do Next

  • Even when investor sentiment is at its extremes, it’s risky to try to time the market. If you need help with your portfolio, call our investment professionals at 800-355-2162.
  • Watch Schwab experts discuss other market and economic topics in the Schwab Market Snapshot.
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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Supporting documentation for any claims or statistical information is available upon request.

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