How ISE Sentiment Index Correlates with the S&P 500 in longer term

Have you read this article “How to Detect the Short-Term Market Reversal by ISE Sentiment Index”?

http://top5indicators.blogspot.com/2013/09/how-to-detect-short-term-market.html

People might think it is just a coincidence that when the ISEE is higher than usual, the market goes down, and vice versa.  Please take a look at chart 1 for the correlation between ISEE and the S&P 500 movement from a longer term.

 

Chart 1: S&P from 7/11/2011 to 7/31/2013
Source: Line Graph Outline from Yahoo Financial.  Actual data compiled by Authors.

          Chart 1 lays out the extremes of ISEE between 7/11/2011 and 7/31/2013. Most of these extremes (highs or lows) occurred near the top or bottom of cycles.  Generally speaking, when the market was at a climax, the ISEE was also high. This means retail investors were optimistic about the future movement. However, it ended up with a pullback or correction. When the market was at the bottom, the ISEE was low too, usually less than 100.

The low ISEE readings ranged between 41 and 96 in chart 5.7, which demonstrated the pessimistic view from the retail investors when the market was at low levels.  This chart is showing the clusters of numbers.  Other numbers around these days revealed the numbers in the neighborhood. 

Please note, if the ISEE reaches the extremes, it usually signals a reversal point in the market or price.  It may not be imminent, but it usually takes place very soon within the next few days. 

          The market usually goes the opposite way of the ISEE reading. We are not saying it works 100% of the time. However, if the reading appears to be out of the box, it is definitely a red flag to watch, especially when you combine this information with other indicators to find out the market is in overbought territory.