Gauging the feelings of investors about the market is also important in determining the health of the market. The reason for this is fairly simple. If the majority of investors are bullish, there are few buyers left to power the market higher. There is only one place for the market to go… down, as the sellers return. If the majority is bearish, there are few sellers left to send the market down further. Bargain hunters begin to smell an opportunity. As more and more money builds on the sidelines, a positive shift in perceptions will usher in a flood of cash and lead to a new bull market.

In any sustained bull market, it’s necessary to have people concerned about the economy, interest rates or stock valuations. These people sitting on the sidelines and/or shorting stocks provide a lot of capital down the road when they are finally convinced that the bull market is for real. When they do, it’s at this time that you may have the makings of a climax top, tempting the pros to sell. You should be selling too.

The following indicators help to gauge the feelings of investors about the market (however, keep in mind that these indicators are of secondary importance). The price/volume action of the market, the action of leading stocks and interest rates are of primary importance.

Put/Call Ratio
When investors buy calls they are betting that the market will move higher. If they buy puts, they are betting that the market will move lower. If the Put-to-Call Ratio is greater than 1, more investors are betting the market will head lower. Since the majority is usually wrong, a spike up in the ratio may signal a market bottom.

Advisory Newsletters
The newsletters are generally bearish at the bottom and bullish at the top… the majority is usually wrong!

Short-Interest Ratio
Measures the total number of shares being shorted vs. the NYSE’s average daily volume. A value of 3 indicates 3 days of short interest… the larger the number, the more shares are being shorted as investors become bearish. A few spikes in the short interest during a bear market could indicate a bull is just around the corner. The crowd is usually wrong!

Public/NYSE Specialist Short Sales
Another short indicator measuring the ratio of public selling short to NYSE Specialists selling short. A spike in this ratio may indicate the bottom of the market… once again, the crowd is usually wrong!