Cabot Master Sentiment Gauge
The Cabot Master Sentiment Gauge plays an important role in our investment thinking. Sentiment, as you may know, is a contrary indicator of stocks prices – when most investors are bullish, that means most people have already bought stocks…and that means there aren’t many buyers left on the sideline, so prices are apt to slip. The opposite is also true, as high levels of fear usually occur near market bottoms.
Our Master Sentiment Gauge is a composite of a few different sentiment-related indicators, each of which is measured weekly. At the end of each week, each indicator is given a score from 0 (most pessimistic) to 10 (most optimistic). And then we tally the score from each indicator, resulting in our Master Sentiment reading, which itself can range from 0 to 100.
While the history of this indicator is limited, it’s proven to be of great value in recent years. Readings below 30 or 35 often occur near market lows – the bear market low of March 2003 saw its reading fall all the way to 12! Conversely, when readings rise above 80 or 85, the market is usually in for some rough sledding, though it should be noted that buy signals (readings below 30 or 35) are more accurate than “sell” signals (readings above 80 or 85).
Actually, because sentiment measures are an inexact science to say the least, we don’t use the Master Sentiment Gauge as a strict buy or sell tool. Instead, it helps us lean against the wind, possibly laying off new buying when readings are above 80 or 85, and maybe adding a stock or two when readings dip to the 30 region. In other words, it helps us keep our feet on the ground, pointing out those few times each year when the crowd is all pushing in one direction.
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