Should traders lean with or against the crowd? In their May 2002 paper entitled “Investor Sentiment and the Near-term Stock Market”, Gregory Brown and Michael Cliff from investigate whether investor sentiment offers any valid trading signals. They find that:
- Direct (surveys of investors) and indirect (technical data such as advance/decline and put/call ratios) measures of investor sentiment are related.
- Investor sentiment measures move with the market, with the strongest link between institutional sentiment and large stocks.
- There is little evidence that investor sentiment measures predict short-term market behavior. In fact, using investor sentiment as a trading signal does not appear to be profitable.
In summary, just because there is a crowd of traders does not mean there is wisdom.
