Profit By Betting Against the Crowd

Investor-sentiment measures can tip you to rallies and corrections. Here are the ones to watch and how to exploit them.

Is there wisdom in crowds? Many professional money managers think so, although usually the wisdom comes from doing exactly the opposite of what the crowd does. And as a smart investor yourself, you may want to learn about and start following some of these “sentiment” indicators.

This isn’t voodoo. Often, sentiment indicators are remarkably accurate. For example, negative sentiment, as measured by surveys from the American Association of Individual Investors, hit the highest level ever recorded on March 5, 2009. On that day, seven out of ten investors classified themselves as bears. Only four days later, Standard & Poor’s 500-stock index bottomed after declining 55% in 18 months and embarked on a recovery that has lifted the benchmark 71.6% through August 4.

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Contributing Editor, Kiplinger's Personal Finance