Contrary Indicators

When moves of a market price are accelerating to extreme levels, market participants are often in a euphoria or panic mode. Their emotions are running high. As an individual trader, I have to be willing to experience my feelings and to see clearly what are happening in the market and its underline conditions, so emotion waves might not carry me away. One of tools can help me see the market conditions is the contrary indicator.

Barry Ritholtz, the host of The Big Picture blog, has a nice research report on contrary indicators - "Contrary Indicators 2000 – 2003 Bear Market". Here is his definition of contrary indicators:

"Contrary Indicators are the data points, signs, and events whose actual significance to the market is the exact opposite of what their initial impression suggests. These counterintuitive signals can reveal when great masses of investors are collectively reacting emotionally to a given event or stimulus. When the herd becomes violently emotional, they typically “shoot first, and ask questions later.” This invariably results in poor investment decisions.

Whenever the investing public panics, the result can be neatly read in a variety of Contrary Indicators. I’ve found it helpful to think of these Indicators as coming in two distinct flavors: “Internal” market signals, and “external” societal displays."

Click here to view the full report.