Have you ever picked the perfect stock to trade, but got on the wrong side of the market? It's happened to us all. But what tools can you use to time the market better? Surveys are an excellent way to get a feel for market sentiment. More importantly, when those surveys hit extreme readings, it is often a turning point for the market and can be used as an entry point for trades. We will discuss 4 surveys today, the Investors Intelligence Survey, the consensus survey from Consensus Inc. in Kansas City, Missouri, the American Association of Individual Investors survey, and MarketVane. We plan to show you effective ways to trade the readings on these surveys.

Investor's Intelligence

The granddaddy of all sentiment surveys is the Investor's Intelligence survey, by Chartcraft, who has been publishing stock market sentiment data since 1963. Just as in the Rydex ratios, we take the amount of bulls (a percentage) plus those neither bearish nor bullish (sideways) and divide that by the amount of bears in the survey. This gives us a ratio. A good way to trade it is to put 21-period Bollinger bands around that ratio and to buy when you get a reading below the lower band. This would be a weekly chart and wait for a cross back in the bands, and hold the trade for 50 weeks. We use the opposite system for bear trades and hold those trades for 7 weeks. The system that tested the best is to buy when the bull percentage crosses the bear percentage just like a MACD crossover. Next is the Consensus survey.

The Consensus Survey from Consensus Inc is an excellent tool for measuring extremes in market sentiment. An excellent way to trade this survey is to use 21-day Bollinger bands around a weekly chart (using 1.5 standard devidations). When I see a reading above the upper band followed by a reading within the band, this is a bearish signal. When there is a reading below the band followed by a reading within the band, this is bullish signal. Also, readings above 71 are overly optimistic and are strong bear signals.

Another system that works well is based on the American Association of Individual Investors survey. They have a weekly poll that shows the percentage of participants who are bullish, bearish, and neutral. The same techniques for the Consensus survey above work well with the the AAII survey as well.

Sum Them Up

Another system that works well is MarketVane from Pasadena California. Their sentiment survey is also worth looking at. Another interesting technique is to take the percentage bulls from all 4 surveys and to come up with a composite reading. We tested this with the Bollinger Band technique and it also worked well. To sum up, these surveys are tradable in the same way that the Rydex, VIX, and Equity Put/Call Ratios are. We are looking for extreme readings that typically show us that market participants are overreacting and therefore creating a high-probability trading opportunity. Look for these extremes in greed and fear, and capitalize on them.

Price Headley is the founder and chief analyst of BigTrends.com.