Academic Perspective on Momentum-Based Investing Webinar

July 2, 2013

Come listen to an academic perspectives as to why momentum-based investing makes sense, and how you may be able to take advantage of it, from one of the pioneers in momentum and relative strength investing, Dorsey Wright & Associates.  This webinar features Tom Dorsey and Andy Hyer.

Click here for a replay of the webinar.


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Stock Market Sentiment Surveys: AAII Edition

July 2, 2013

Greenbackd, a deep value blog, had a recent piece on the value of stock market sentiment.  Stock market sentiment surveys have been a staple of technical analysis for decades, ever since the advent of Investors Intelligence in the 1960s, so I was curious to read it.  The study that Greenbackd referenced was done by Charles Rotblut, CFA.  The excerpts from Mr. Rotblut that are cited give the impression that the results from the survey are unimpressive.  However, they showed a data table from the article.  I’ll reproduce it here and let you draw your own conclusions.

Source: Greenbackd   (click on image to enlarge)

From Greenbackd, here’s an explanation of what you are looking at:

Each week from Thursday 12:01 a.m. until Wednesday at 11:59 p.m. the AAII asks its members a simple question:

Do you feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)?

AAII members participate by visiting the Sentiment Survey page ( on and voting.

Bullish sentiment has averaged 38.8% over the life of the survey. Neutral sentiment has averaged 30.5% and bearish sentiment has averaged 30.6% over the life of the survey.

In order to determine whether there is a correlation between the AAII Sentiment Survey and the direction of the market, Rotblut looked at instances when bullish sentiment or bearish sentiment was one or more standard deviations away from the average. He then calculated the performance of the S&P 500 for the following 26-week (six-month) and 52-week (12-month) periods. The data for conducting this analysis is available on the Sentiment Survey spreadsheet, which not only lists the survey’s results, but also tracks weekly price data for the S&P 500 index.

There are some possible methodological problems with the survey since it is not necessarily the same investors answering the question each week (Investors Intelligence uses something close to a fixed sample of newsletter writers), but let’s see if there is any useful information embedded in their responses.

The way I looked at it, even the problematic AAII poll results were very interesting at extremes.  When there were few bulls (more than 2 standard deviations from the mean) or tons of bears (more than 3 standard deviations from the mean), the average 6-month and 12-month returns were 2x to 5x higher than normal for the 1987-2013 sample.  These extremes were rare—only 19 instances in 26 years—but very useful when they did occur.  (And it’s possible that there were really only 16 instances if they were coincident.)

Despite the methodology problems, the data shows that it is very profitable to go against the crowd at extremes.  Extremes are times when the emotions of the crowd are likely to be most powerful and tempting to follow—and most likely to be wrong.  Instead of bailing out at times when the crowd is negative, the data shows that it is better to add to your position.

HT to Abnormal Returns

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The Rising Cost of Long-Term-Care Insurance

July 2, 2013

Today’s WSJ article “Long-Term-Care Insurance Gap Hits Seniors” should provide plenty of motivation for anyone who may be inclined to skimp on their savings.

The long-term-insurance industry now is shrinking, premiums are soaring and there is no fix in sight. At the same time, government safety-net programs, already under cost-cutting pressure, are bracing for demand from more of the 77 million aging baby boomers.

Currently, Medicare pays for only short stays in nursing homes or in-home care under limited conditions. For the most part, seniors who need care have to burn through their savings to pay for it. Only after they are impoverished will Medicaid—the government health program for poor people—pay for a basic level of care.

Insurers have been aware of this gap for decades, and many began selling long-term-care policies in the 1980s and 1990s. They vowed to provide policyholders with better access to high-quality nursing homes and home-based health care than Medicaid.

But insurers underestimated how fast medical costs would rise, and how many seniors would actually use the benefits. And they underpriced the insurance premiums. Making matters worse, some insurers that were “hungry for market share” charged too little at first and planned to increase premiums later, says Joseph M. Belth, editor of the Insurance Forum newsletter and professor emeritus of insurance at Indiana University.

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Relative Strength Spread

July 2, 2013

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks).  When the chart is rising, relative strength leaders are performing better than relative strength laggards.    As of 7/1/2013:

rs spread 07.02.13

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