Saturday, April 25, 2009

A Valuable Sentiment Indicator is in Bull Mode

Kudos to the excellent Decision Point site for this three-year view of the weighted and unweighted versions of the S&P 500 Index.

When market sentiment is bullish, we see a speculative interest in the smallest components of the index. This interest leads to outperformance of the unweighted index versus its cap-weighted counterpart.

Conversely, when traders and investors are more defensive, they shy away from more speculative names and stick to the most established blue chips. That leads the weighted S&P Index to outperform the unweighted version.

Note how the ratio between the unweighted and weighted indexes (bottom pane) peaked early in 2007, well ahead of the bull market peak in $SPX. The ratio also bottomed in December, well ahead of the March bottom in $SPX. The ratio is currently in a raging bull market mode, exceeding its bull market peak.


Tony said...

What is a good source for viewing the unweighted S&P?

Mark said...

So what does this indicator suggest?

AKA_CES said...


I find this hard to interpret w/o reference to more comparative bull & bear market data.

What the chart does show, a deep plunge and steep rebound in the smallest components, seems consistent w/ bear market rallies as described recently in Bill Hester's analysis at Hussman's site recently -- "Trading Volume Separates Bull Markets from Bear Rallies",
though Hester's analysis does not partition the market by cap size. Market capsize next ? ;)

I continue to learn a lot from your blog, going on several years, and I've purchased your your "Psychology of Trading" book. Your work is much appreciated.


Dad said...

I tend to interpret the unweighted chart as a severe spike ready for a correction, but I am new to trading the last couple of years.

I just ordered a coupel of your books after working through a couple of Mark Douglas's books. I love you blogs and twitter feed. Very helpful. I have been trading a sim ES account for the last couple months to get more consistant and find an edge. I already spent quite a bit on "education" with stocks and options.

Dad said...

The spike looks to me like something due for a correction in a very volitle market, but I am relatively new to trading (2 years now).

I ordered two of your books yesterday after working through Mark Douglas' "Trading in The Zone".

I love you blogs and twitter feed. Very helpful.

BTW, I am new to trading futures and have set myself to trading a SIM account on the ES until I find a workable and consistent edge. What are your thoughts on sim trading? I also journal each day now and analyze why I did what I did and how I felt when I did it.

fisherking61 said...

I am an avid follower of your excellent blog and have bought all of your books. If it is true that the more you share, the more you eventually reap, I have no doubt that all your phenomenally hard work will pay off handsomely.
I understand this weighted-versus-unweighted remark that you raise. At the same time, however, looking at the chart, I am wondering if the indicator actually does not offer more value to a contrarian (notice, for instance, how the 2007 peaks in the unweighted actually preceeded the subsequent drop in stocks). With that reasoning, recent peaks should be a reason for caution. In order to answer, one would of course need a decent data sample.

Keep the good work !

Luca (fisherking)

Brett Steenbarger, Ph.D. said...


The unweighted S&P is available via the Decision Point site and is tracked by the RSP ETF. The comparison of unweighted and weighted versions gives a little insight into speculative sentiment--