How to Use Bullish Consensus with Seasonal Patterns
By: George Angell
The following is an excerpt from George Angell’s Small Stocks, Big Profits
For almost 40 years now, seal firms have attempted to measure the relative bullishness of the stock market by publishing weekly bullish consensus numbers. A company known as "Market Vane," based in Pasadena, California, pioneered the idea of taking a weekly survey of select market participants and trying to come up with a single percentage that reflected their thinking. In general, a high number (above 70 percent) suggested bullishness; a low number (under 30 percent) suggested bearishness. The idea, however, was to use the numbers as a so-called "contrary" indicator – that is, high bullishness often signaled the market was overbought and high bearishness signaled the reverse, an oversold market. The reasoning was that if so many participants were bullish, the market had nowhere to go except down. Likewise, with the predominate crowd of investors bearish, the market, went the thinking, was ripe for a sharp middle, however, the readings were decidedly mixed. To use contrary indicators you clearly wanted an overwhelming majority on one side or another.
One way to time the market on a seasonal basis, therefore, is to use the Bullish Consensus as a contrary indicator in conjunction with seasonal patterns. Remember, the hallmark of contrary opinion theory is that the crowd is typically wrong at the major turns. So let's assume for a minute that we are considering a seasonal trade in a particular stock, but we want to refine our timing skills by looking at a confirming indicator.
Because October is almost always a weak month in terms of stock prices, let's assume we are looking to buy XYZ stock. A glance at the stock tables tells us what we undoubtedly already know, XYX is trading at, let's say $3 having had a 52-week range of $8 on the high and $2 on the low. Clearly the stock had been beaten down. To further refine our strategy, we might look at the Bullish Consensus numbers for the stock market as a whole. Let's say the percentages are close to the bottom, less than 10 percent. It's October, the weakest month of the year, and the news is primarily bearish – so bearish, in fact, that 90% of investors see the market going lower and only 10 percent anticipate higher prices in the months ahead. Believe it or not, this is an ideal buying opportunity!
When the last seller has sold, the low has been reached. A conformation of the reverse in the trend is a rise in the Bullish Consensus. So after observing a reading under 10 percent, let's say investors become a little more bullish (but still very bearish) as the percentages rise to say, 15 percent. This is the signal to buy.
Here are some rules:
- By the first Friday of October, the Bullish Consensus must be at or below 40 percent – and it must be a lower number than the week before.
- On or before November 30th, the Bullish Consensus must be a higher number than the week before.
- Buy as soon as you see this change in the trend of the Bullish Consensus numbers.