Time the stock market: ignore the herd!

When a stock market up trend finally comes to an end it tends to fool just about everybody. But there are certain signs that may tip you off and reward you for being on top of it.

Contrarian indicators are indicators that point to the timing of a trend change when the general viewpoint is in opposition. Some of these work at market peaks and others work well when the stock market bottoms out.

The stock market is a strange thing for investor psychology and it's not just the general mindset of the market. It's also about how we as investment portfolio engineers handle it. See the following so you may build useful knowledge of how the stock market works.

Related: How to beat the markets.

Put-call ratio

The options market is notorious for demonstrating investor exuberance and, at the other extreme, fear. The put-call ratio for equities tends to spike sharply higher right near the low of large dramatic stock market declines. It shows how investors have loaded on put options in an attempt to hedge portfolios or attempt to profit from the market's decline. When fear takes over the number of puts purchased overwhelms call buys.

Historically the put-call ratio needs to be above 1.0 before selling in the market comes to an end. In the last several years this ratio has been 1.2 at its extremes. During the Covid 19 bear market the put-call jumped to 1.30.

Long term put-call performance

Stocks trading above moving average(s)

If you track the number of stocks above moving averages stat. you'll see how extremes on the upside coincide with market peaks. It works reasonably well at market lows too although only at the most extreme bear market declines.

While the swings may appear short term, many market consolidations are normal over the course of a longer term up trend. Day traders might be able to use this measure but for the average investor and fund manager watch this isn't over used.

Stocks above the 200 day moving average

Preferred Shares

You wouldn't think preferred shares would tell us anything but this area of the stock market was profoundly useful during the credit crisis. In fact preferred shares were the first detectable part of the market turn down and it was long before the stock market went into its historic nose dive.

CPD on the TSX (Canadian market) is an E.T.F. that may be used to detect a break down in conditions that can trigger a stock market decline. While its usefulness will likely diminish over time it can be added into the arsenal of contrarian indicator analysis.

Baltic Freight Index

The Baltic Freight index isn't going to be ranked as one of the better contrarian indicators but it can provide more evidence to identifying a down trend in the stock market.

How to time the market with sentiment indicators

A review of these sentiment indicators can be useful especially when the stock market has been trending higher for a while. They don't necessarily require daily review but when the market is approaching an extreme your awareness can pay off nicely.