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<B><FONT size=+1>BASIC TECHNIQUES
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<BR><BR></FONT><FONT size=+4>A 10-Year Overview <BR>Of Market
Sentiment</FONT></B>
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<I><B>by Joe Duarte, M.D.<BR><BR>
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</B><FONT size=+1>Crowd psychology plays a role in the development of market
tops and bottoms. In theory, a bottom forms when the majority of investors
are extremely pessimistic, and a top occurs when the investors are uniformly
bullish. Here's a review of the past performance of a collection of
indicators used to measure investor sentiment.</FONT></I><BR>
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<P><FONT size=+2>I</FONT>n my January 1992 STOCKS & COMMODITIES article,
I described a group of seven indicators which, when combined, produced an
extremely accurate forecaster for higher prices in the Standard & Poor's
500 index. Over the following six years, the indicator proved to be highly
effective in predicting higher prices when gauged a year after giving a buy
signal as measured by the S&P 500, during an extraordinary period in
market history when the index climbed 708 points and 233 as of February 8,
1998. The indicator combines weekly stock market survey numbers, the S&P
500, a short-term moving average, and two other market sentiment
measures.</P>
<P><BR>On August 1, 1997, the combination of the seven indicators -- the
Super Seven market forecaster -- gave its first-ever sell signal. On October
27, the US stock market as measured by the Dow Jones Industrial Average
(DJIA) dropped 554 points. On December 26, 1997, and January 7, 1998, the
Super Seven gave its second and third sell signals, casting a shadow over
the longest bull market of the 20th century. <BR><BR><B>MARKET
SENTIMENT<BR></B>Financial markets express the predominant opinion of market
participants about the future prospects of their underlying assets. Market
participants buy because they are optimistic, and they sell because they are
pessimistic. In theory, if everyone were optimistic, then the market would
basically be a house of cards, as there would be no one left to pay higher
prices. Any liquidation will force much lower prices as investors move to
lock in profits.</P>
<P><BR>The opposite happens at significant market bottoms. At bottoms,
investors are convinced that lower prices of equities are a foregone
conclusion, that all of the news on the horizon will simply justify waiting
for better opportunities. This high degree of pessimism sets the stage for
buying opportunities as the investing public waits for a sign that the worst
is behind them. Since the occurrence of Tulipomania, the classic and
well-documented speculative bubble of the 1600s, there have been numerous
accounts of investment booms and busts. Fortunes have been made and lost by
traders who failed to identify crucial turning points in market
behavior.</P>
<P><BR>In <I>Trader Vic</I>, Victor Sperandeo wrote:<BR><BR>The fastest and
most risk-free way to make money in the markets is to identify a change of
trend in a market as early as possible...<BR><BR>This can be difficult, as
trends often reassert themselves after a break and more than once before
turning in the opposite direction. Thus, a prerequisite to spotting a trend
change is to identify extremes in market sentiment, which will usually
precede a definite change in trend.<BR></P>
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<P><FONT size=-1><B>FIGURE 1: BUY CONDITIONS.</B> <I>This table outlines the
parameters of the indicators for a bullish outlook.</I></FONT></P>
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<BR><I>Joe Duarte is an occasional S&C contributor and has been featured
as a CNBC market maven. He is a registered investment advisor, president of
River Willow Capital Management (12240 Inwood Road, Suite 207, Dallas, TX
75244), and the publisher of </I>The Wall Street Detective<I> newsletter and
The Wall Street Detective Online (www.wallstdet.com). He can be reached via
E-mail at forestln@xxxxxxxx </I>
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<H5><I>Excerpted from an article originally published in the May 1998 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 1998, Technical Analysis, Inc.</I> </H5></BLOCKQUOTE>
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