How Daily Small Trader Market Sentiment Forecasts & Times
Short Term Market Moves

Overview

Market sentiment and contrary opinion as measured by various indicators have been used by traders for many years. The theory of contrary opinion asserts that if a majority of traders agrees on the direction of a market move, then the odds are significant that prices will, in fact, move in the opposite direction. Various measures of market sentiment have been used over the years in attempts to apply contrary opinion effectively in the markets. Among these are odd lot short sales, options volatility, broker opinion surveys, and trader opinion surveys. The good news is that the theory of contrary opinion is correct; the bad news is that the traditional measures of contrary opinion either tend to be LATE or generally unreliable.

The DAILY SENTIMENT INDEX (DSI) was initiated in 1987 to gather the opinions of traders on all active US futures markets and in the mid 1990's for the Euro zone interest rate and equity futures markets. The primary difference between all other market sentiment indicators and the DSI is that the DSI is available within one hour and that the DSI gathers the opinion of the small retail trader who is most likely to be WRONG at market turning points.

By examining small trader sentiment we can arrive at a very valid measure of contrary opinion that has had an uncanny record of accuracy for many years. Yet, we also know that in spite of the fact that small traders are usually the most bullish at the top and the most bearish at the bottom, the real issue is HOW TO TIME market entry using the DSI. As always, timing is the ultimate issue. This report will give youan overview of DSI and timing with DSI. In the charts below DSI is shown as percentage of traders bullish. Here is what the daily DSI report looks like. the cells show the % of small traders bullish on the market. The four (4) columns show raw DSI and 3, 5, 9, and 18 day moving averages of the raw DSI. The sample shown below illustrates a typical daily report.

SAMPLE	Network Press Inc., Daily Sentiment Index
	Date, Raw % bullish, 3, 5, 9, and 18 day Moving Averages
DSI	08-19					08-16					08-15					08-14					08-13
	Raw	3ma	5ma	9ma	18 ma	Raw	3ma	5ma	9ma	18 ma	Raw	3ma	5ma	9ma	18 ma	Raw	3ma	5ma	9ma	18 ma	Raw	3ma	5ma	9ma	18 ma
Market	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up	%Up

T-Bonds	53	56	70	77	75	45	68	77	80	77	71	84	86	84	79	87	90	87	86	80	93	91	87	85	80
T-Notes	61	64	73	79	77	59	71	79	82	78	73	82	85	85	80	81	88	87	87	81	93	90	88	86	81
Euro Dollar	65	70	76	79	76	65	76	79	81	77	79	83	83	83	78	83	84	83	84	78	87	84	84	83	78
S&P Index	71	70	64	59	48	68	69	62	55	45	71	61	60	49	42	68	57	58	43	38	44	54	51	40	35
Nasdaq Index	71	69	61	53	44	69	67	55	48	41	68	55	51	42	38	65	47	47	37	34	32	40	41	32	31
Swiss Franc	36	49	52	49	47	55	55	56	48	49	56	56	54	49	48	55	56	50	49	50	58	53	48	49	52
Euro FX	31	48	52	51	48	56	56	58	51	50	58	58	56	51	49	55	59	52	51	50	62	56	51	51	52
Japanese Yen	59	68	70	61	48	71	75	72	56	49	75	74	67	52	48	79	71	59	48	48	68	61	52	43	49
British Pound	23	37	39	33	40	46	44	41	34	43	42	41	36	33	44	44	39	32	34	46	38	31	29	32	49
Canadian Dollar	33	54	58	52	46	65	64	60	52	47	64	65	56	47	44	63	57	51	44	42	67	50	48	40	41
Dollar Index	55	37	34	40	46	28	27	30	40	43	28	29	34	44	45	25	31	40	44	44	33	39	44	47	43
Crude Light	89	86	82	65	64	83	82	79	62	63	85	79	70	59	61	77	76	59	57	60	75	62	50	55	60
Heating Oil	80	82	77	62	62	84	80	75	61	61	82	74	66	56	59	74	70	56	54	58	66	57	48	52	57
Unleaded Gas	75	75	73	65	62	73	74	71	63	62	77	72	67	60	60	72	68	62	58	60	66	61	58	55	60
Natural Gas	77	74	70	58	55	75	70	68	53	55	71	66	61	48	52	65	65	55	45	51	63	56	47	43	50
Gold	16	23	28	44	34	25	26	35	46	34	28	32	44	49	33	24	41	51	51	36	45	56	61	51	39
Silver	15	20	22	32	24	23	21	26	33	24	22	24	31	34	23	19	28	36	34	26	30	39	41	34	28
Platinum	66	72	73	68	52	74	75	73	64	49	77	74	71	59	46	75	71	68	54	43	71	68	64	49	40
Copper	43	43	34	27	25	41	35	29	24	23	45	28	25	22	21	19	20	20	19	20	20	21	19	21	20
Corn	75	81	85	80	73	81	86	88	80	73	86	90	86	80	72	92	91	82	79	72	92	84	78	76	71
Wheat	77	75	81	82	74	73	78	83	82	73	75	84	84	83	73	86	88	85	83	73	92	87	85	81	73
Oats	75	77	80	75	70	75	80	80	75	69	80	83	79	74	69	84	82	76	73	69	85	76	73	71	69
Soybean	61	72	78	74	67	73	80	82	75	68	82	85	80	75	67	85	86	76	74	68	87	78	73	73	67
Soybean Oil	65	76	79	75	71	77	82	83	75	71	85	85	80	74	70	85	85	77	73	70	85	77	73	72	70
Soybean Meal	60	74	79	78	70	77	83	83	79	70	85	86	83	79	69	88	85	81	78	69	85	81	78	77	69
Orange Juice	66	70	70	71	70	70	71	72	71	71	73	71	73	71	71	70	72	74	70	72	69	74	72	70	73
Coffee	12	14	17	18	17	15	18	19	18	18	15	20	20	19	18	24	22	21	19	17	20	20	19	18	17
Cocoa	73	71	68	62	62	69	69	64	60	61	72	66	62	57	60	65	60	58	53	61	62	57	57	53	62
Sugar	45	57	59	60	57	60	63	61	61	58	67	63	61	60	59	63	59	61	59	59	60	59	61	58	60
Lumber	22	21	20	19	22	19	19	19	19	22	21	20	19	19	22	18	18	19	21	21	22	19	18	23	21
Cotton	65	63	63	55	58	60	63	64	52	58	63	64	59	49	58	66	65	54	50	59	63	55	48	50	60
Live Cattle	61	62	65	68	69	62	64	66	69	68	64	67	70	69	68	66	68	71	70	69	70	73	72	70	69
Live Hogs	18	17	17	24	34	15	17	17	25	36	18	18	24	27	37	18	18	27	29	39	17	27	29	30	41
Pork Bellies	19	22	24	27	20	23	26	23	28	21	25	26	25	27	21	29	23	28	25	21	23	24	29	22	25
CRB Index	72	77	78	71	65	77	80	79	69	64	82	80	76	67	63	80	79	71	65	64	79	73	66	63	64
Nikkei Index	29	30	28	28	23	28	30	27	27	23	33	28	28	26	22	28	24	27	24	22	24	26	27	22	21
* = Market Closed

Daily Sentiment Index at Extremes: Typical Behavior

In gathering over 18 years of daily sentiment a number of clear patterns have emerged.

They are as follows:
• When the DSI rises to the 85% area or higher the odds of a top are significant
• When the DSI falls to the 15% area or lower, the odds of a bottom are significant
• The longer the DSI remains at a high level, the larger and longer the coming decline is likely to be
• The longer the DSI remains at a low level, the larger and longer the coming rally is likely to be
• The small trader is NOT always wrong at turning points they are USUALLY wrong at EXTREMES
• The DSI can be used as a timing indicator on its own
• The DSI can be used as a timing indicator when combined with other indicators and as part of an overall trading model.

HERE ARE SOME CHARTS ILLUSTRATING THE DSI AT MARKET EXTREMES:

This chart shows the DSI plotted against the Euro. I have marked areas where the DSI was at an extreme high or low. Note the close correlation between DSI tops and bottoms and price tops and bottoms. Note also that DSI is a LEADING indicator - it tends to precede price tops and bottoms. Furthermore, DSI can be combined with traditional indicators as a confirming tool.

This chart shows Natural Gas futures plotted against daily DSI. As you can see, the highs and lows in DSI at EXTREMES correlate closely with tops and bottoms in price. Here also note that the DSI tends to precede tops and bottoms and it is, therefore, an effective leading indicator.

This chart shows an entirely different application if DSI. I've run a moving average of the DSI (red line) with a moving average of the moving average (blue line). Short term buy and sell signals are indicated when the lines cross. By adding trailing stops and effective risk management, the DSI can be used more systematically as its own confirming indicator.

This chart shows the EuroStoxx 50 vs two moving averages of DSI. Signals occur at the moving average crossovers.

Timing Indicators and DSI

In addition to the applications above, DSI can be used in conjunction with technical indicators such as momentum, stochastic's, ADX, RSI and moving averages either as a confirming indicator, but more often as a leading indicator of possible trend changes.

Who Uses the DSI?

The DSI and DSI Europe are used by some of the most well know institutional investors, money managers, banks and brokerage firms as well as individual traders the world over. Subscribers to the DSI service read like a "who's who" of major players in the markets.

Suggested Applications of DSI

Within the context of a trading model that includes a SETUP, TRIGGER and FOLLOW THROUGH procedure the DSI is a SETUP. In our experience its best application is as part of an overall timing approach that includes other indicators as well as a trigger for position entry. DSI can remain at a high or low level for many days and in this way it is similar to various other "overbought" or "oversold" indicators. DSI clients have developed a variety of proprietary applications for DSI.

Summary

The Daily Sentiment Index has shown itself to be a valid indicator of short term market swings. Since DSI is not derived from price it is distinctly different than the vast majority of indicators currently being used by traders. DSI provides an "emotional" indicator of market behavior which, given that it is not directly related to price, places it in a unique position in the broad spectrum market related data. There are numerous other uses above and beyond those described in this brief report. DSI clients currently include some of the top money managers, traders, financial institutions and speculators throughout the world. DSI data is available within one hour of market closings. It is supplied as a report, data file or recorded message. It can be delivered by FAX, data download (FTP) and/or Internet. The entire historical data base (from 1987 to present in US markets) is available for research purposes and accompanies all subscriptions.

Revision date: 12/30/11

How Daily Small Trader Market Sentiment Forecasts & Times Short Term Market Moves