Bears, Contrarians and the Crowd

Welcome to Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above average.
–Garrison Keillor


These days, everyone wants to be a contrarian. 

That absurd statement leads us to taking a look at Contrary Sentiment (and other indicators). This highly misunderstood aspect of Technical Analysis can be a source of confusion to long term investors and short term traders alike.

First off, s consider how many people like to think of themselves as not part of the crowd. Surveys show that 80% of people with automobile licenses consider themselves to be "above average drivers."

Like the improbable children of Lake Wobegon, this is not statistically  possible.

But it reveals something of Human nature: People like to consider themselves separate from — or better yet, superior to — the crowd. At the same time, our experience has been that most people unknowingly act with the crowd.

It is an inherent biological trait, one that has developed over millions of years. There is safety in numbers. In all of those Mutual of Omaha Wild Kingdom episodes I watched as a kid, it was always the gazelle on the outskirts of the herd that got taken by the lions.

The safety and success of going with the flow can be summed up by John Maynard Keynes: "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."   There is much truth to that.

While many people like to think of themselves as contrarians, the reality is that in the markets, the crowd is what moves the indices. Consider how many Wall Street cliches are a recognition of the power of the masses:

-Don’t fight the tape
-The trend is your friend
– Never catch the falling knife
– A rising tide lifts all boats

Each of these aphorisms distilled to its essence are alluding to the power of crowds. Both directly and indirectly, the masses of buyers (or sellers) are what move markets. People forget the simple truism that markets go higher when there are more buyers than sellers, and lower whent there are more sellers than buyers.

Which brings us to today’s look at sentiment. One of the things I keep hearing is that there are "too many Bears for the market to go down." That statement is true when Bearish sentiment reaches a true extreme; it can also be true for very short term counter trend rallies.

But just because sentiment is negative or positive does not mean markets automatically must go in the opposite  direction. Helene Meisler looked at some past periods where negative sentiment was pretty consistent — and martkets went down anyway. Specifically, she looked at the Investor’s Intelligence readings
from the early 1970s, specifically 1973-74:

"From March 1974, the DJIA
traded between 846 and 800, roughly a 5% range. In that same time frame, the
percentage of bearish newsletter advisers rose steadily from a low of 27% to
60%. The DJIA finally broke 800 in July 1974 year; by then, the bears were
already at 60%. They climbed further to a peak of 69.6%.

In other words, the bears were right. And look at how they stayed bearish for
the whole decline.
The current reading for the percentage of bears is quite high at 34.7%,
although it is well off its peak reading of a few weeks ago. But note that it
has been in this mid-30s range since mid-June.

When folks ask me, as they often do, where sentiment is now, I must report that it is bearish. It has been bearish and it has not changed. Yet all those bears haven’t helped the market rally longer than a handful of days at a time.

Perhaps there are too many bears out there. Perhaps all these bears will lead to a lasting rally one day, but all those bears didn’t help the market in 1974 and so far it hasn’t helped the market since June.

When I see the number of stocks making new highs increase and volume increase along with it, I will be happy to jump into the bull camp. But for now I continue to be part of the bear consensus."

That the crowd has become negative as the economy is cooling and inflation is still present may not be a great contrary indicator; Perhaps it generates a pop lasting a few weeks. But as we have seen in history, the crowd is typically correct — until they reach great extremes.

There are all too many pseudo-contrarians who do not understand how (and when) these sentiment indicators work; I saw one that claimed the Housing posts on this blog were a buy signal for the Homebuilders.

Compare that with the "Home Sweet Home" on the cover of Time magazine in June 2005 as a sell signal for the home builders.

Investor’s Intelligence Bearish Percentage and DJIA, 1973-74      

Investor’s Intelligence Bearish Percentage 2003-present      34326


As Helene’s charts above show, we are nowhere near extreme levels of sentiment that have in the past, reliably produced major reversals or even counter trend rallies.


Confessions of a Consensus Bear
Helene Meisler, 8/25/2006 9:00 AM EDT

Home Sweet Home
Time magazine, June 13, 2005,16641,1101050613,00.html

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Tom commented on Aug 29

    Nitpick: Surveys show that 80% of people with automobile licenses consider themselves to be “above average drivers.” Like the improbable children of Lake Wobegon, this is not statistically possible.

    Suppose that 80 people rate 5 as drivers and 20 people rate 0. The average is 4 and 80% are indeed above average. Whew! Glad I got that off my chest.


    BR: That’s not what the distribution of surveyed drivers looked like. Some people thought they were average, a small percentage of people thought they were bad drivers, and the vast majority claimed to be above average.

  2. Sailorman commented on Aug 29

    Can someone explain the mechanics of extreme bearish sentiment driving the markets up?

    I would have guessed that bears would be sellers — not buyers and the more of them, the more the market would drop.

  3. doh! commented on Aug 29

    “The trend is your friend, til the end, when it bends…” At the end of the bearish sentiment, everyone HAS sold, and prices stop falling and can only go up on the slightest whiff of good fundamental data, or nothing at all. Like recessions, valuable extremes in sentiment sometimes can only be seen in retrospect. We may have a lot of bears now, but who’s to say we can’t get even more bearish? No one can predict. Hey, Barry, have you read Fooled by Randomness? Great stuff.

  4. Craig H commented on Aug 29

    With the VIX at a complacent reading of 12.18 and the Put/Call ratio at 0.98 people may say they feel dour on the economy and market but they’re not betting the ranch on the bear side.

    We reach extremes that are playable by contrarians when an overwhelming majority feels so bullish that they’re fully invested in stocks thus there’s hardly anyone one left with cash to buy more, or so bearish that they’ve sold all their inventory thus there’s no one left to sell any more stock.

    Trying to be a contrarian at other times is a low percentage play. You’ll usually get trampled by a charging herd that hasn’t run out of steam yet, or picked off by the lions because you strayed too far from the group at the wrong time.

  5. Nugget commented on Aug 29

    The dynamic is even more stark. In the Journal of Personality and Social Pathology a study (1) demonstrated that the less capable a person is, the more likely they were to have an overly-favorably view of their own skills. That, in fact, the lacking a skill itself is an impediment to being able to judge the skill in yourself or in others. Thus, poor drivers are not only bad at driving but are also less able to identify the attributes which exemplify a skilled driver.

    Accordingly, the worse a person is at investing and evaluating markets, the less likely they will be to recognize their lack of skill in that domain.

    1. Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments, Journal of Personality and Social Psychology, 1999, Vol 77, No 6.

  6. doh! commented on Aug 29

    A nugget indeed. Thanks.

  7. Michael C. commented on Aug 29

    Consumer sentiment numbers stank up the joint. And initially the markets are shrugging them off.

    Things are stinking on main street, but wall street wants to party party party.

  8. Barry Ritholtz commented on Aug 29


    People get bullish AFTER they buy, and bearish AFTER they sell.

    Consider the person thinking about purchasing a given automobile (Accord, Camry, FX45, PT Cruiser, etc.) Before the purchase, they will give you the pro and cons of each model. After the purchase, they will gush about all the virtues of their new car — no matter what model it is.

    The reason for this is their sense of self (or even self esteem) becomes tied up in that purchase.

    While they may have doubts prior to a stock purchase, afterwards, they typically become even more bullish.

    When everyone is in, who else is left to buy and take the market higher? On the downside, when everyone has sold and is sitting in cash, the next move is typically up as these players all jump back in . . .

  9. john john commented on Aug 29

    it’s all about cognitive dissonance….

    As the most supreme guru Homer Simpson: “It’s everyone else’s fault but mine!”

  10. doh! commented on Aug 29

    I noticed that at the recent top in oil prices the contrarians had stopped calling for a big correction. It was rather quiet at the top with everyone playing the storm that never arrived.

  11. DavidB commented on Aug 29

    That reminds me of one of my favorite lessons:

    The crowd is usually right…except in the extremes.

    It is a contrarian’s job to determine what the extremes are. That was the hard lesson I learned from the tech mania buying short term put options on 400 P/E and 20 P/S jokes. Can you believe I sold my nortel $100 strike puts with the stock at $80? I still can’t. Had I waited and rolled down to lower strikes I wouldn’t be working today.

    A good contrarian will not go against the fundamentals but against popular opinion. It is their job to determine where the crowd will be in the affordable near future, buy up everything in sight before the crowd arrives and when the crowd comes flooding through the doors to be there with a warm smile ready, willing and able to sell to them

  12. wcw commented on Aug 29

    Quite so, but we mediocrities have a special tool to catch ourselves: measurement. I know my monthly alpha, its t-stat, and the biggest weakness of that method (regression implicitly adjusts for realized risk, but it cannot possibly take into account actual in-the-moment risks that happened not to result in price moves).

    Also, while Tom’s critique is clever, it really doesn’t say much about reality. Human experience shows a lot of endeavors where a very few are stellar performers, in which hence 80% can be below-average. There are very few in which 20% are zeros.

  13. permabull commented on Aug 29

    Let me preface my comments by saying that I think this is one of the few informative and interesting market sites and my thanks to Barry for all his work.

    Having said that, it seems to me that this post is mistaken in several matters.

    Firstly, the chart of sentiment and the Dow during 1974 is disengenuous. By March 1974, the Dow had endured two shattering 20% declines in the previous 15 months – separated only a short lived rally in Q3 of 1973.
    In other words, by March of 1973, a long bear market had already been underway for 15 months – a completely different situation to today.

    Secondly, the comments on the Investors Intelligence numbers being nowhere near levels found at major market lows are simply wrong.
    A look at the chart on I.I.’s own website – – shows that the %Bulls and % Bears are nearly evenly balanced – a condition only seen recently at the major market lows of 2002 and 2003.

    Moreover, since 2002, readings of above 35 in the % Bears figure have been seen rarely and only at major market lows. The recent readings above this level are perfectly consistent with a major market low based on I.I.’s own chart.

    Whether the recent readings prove out as a major low – who knows? But the chart on the I.I. website is, to my mind at least, perfectly clear – and indicative of a major low in progress.

    Lastly, let me state my own biases – I’m an old investor – I retired early some years ago and have lived off an increasing stream of dividends for a good few years. I dont trade and I dont have debt – but I will steam in every four or five years when theres a shakeout and buy more of the things I like. So, I’m biased old bull – but a selective one – the last time I bought anything was in late 2002.
    Anyhow – I do enjoy this site and am most grateful to Barry for providng all the interesting articles and his own well thought out views.

  14. DavidB commented on Aug 29

    Human experience shows a lot of endeavors where a very few are stellar performers, in which hence 80% can be below-average. There are very few in which 20% are zeros.

    Ah! Spoken like a person who has never driven in rush hour!


    Just kidding (;

  15. permabull commented on Aug 29


    The fifth sentence in my previous post should read:-

    “In other words, by March of 1974 ,….”

    not ” by March of 1973,..”

  16. drsqueeze commented on Aug 29

    Sentiment works when it’s going in the opposite direction of the market. So if the market is going down with negative sentiment, that is not significant, likewise going up on positive sentiment is not bearish. But a strong market with negative sentiment and a weak market with positive sentiment are both significant signals that the market is right and the crowd is wrong. The chart you post of sentiment getting more bearish as the market rises is a bullish indicator that you, again, explain away.

  17. Pradeep commented on Aug 29

    There are all too many pseudo-contrarians who do not understand how (and when) these sentiment indicators work; I saw one that claimed the Housing posts on this blog were a buy signal for the Homebuilders.

    Now that refers to what I said on my blog and if anyone reads the entire logic and see the history of posts on this blog during that time, they can make up their own mind.

  18. Michael C. commented on Aug 29

    Wow, you had quite a while to load up the boat on those aweful sentiment numbers.

    It’s as if everyone stood around looking at each other after the numbers came out and asked,

    “Yah, those numbers stink. But are we still buying?”

  19. BDG123 commented on Aug 29

    I wrote about this exact time frame and sentiment three months ago. The 1974 chart is more than relevant. The prior cycle was a muliti-year decline in the averages after a long wave bull run similar to 2000. The market had peaked in early 1973. It was the third year in the subsequent bull market post the 2000-2002 comparable decline. Optimism amongst the elite was at a very high level for future growth. Optimism within the working class was very muted. Globalization. High commodity prices. etc, etc.

    The point you need to take from this is that sentiment can stay oversold. Nothing else.

  20. jim commented on Aug 29

    Bernie Schaeffer did an article recently that put him in the same camp that I’ve been in for awhile. That stocks are pretty much stuck in a range and will not move a lot up or down. His theory as too why is somewhat different from mine. I think legions of traders the world over, trading the U.S. market online,ready to short or go long at a moments notice, provide both a ceiling and a floor. Schaeffer has subscribers in around 130 countries. I wouldn’t have thought there was that many countries in the world with ready investors. However, I still reluctantly pitch my tent in the bear camp.

  21. BDG123 commented on Aug 29

    Bernie is completely wrong and I’ll give you a very short answer why.

    First, there is zero precedence for it. We have not been in a trading range for years as he might state. The Dow, Naz and SPX have been. But if you owned the right indices or the right stocks, this has not been a range bound cycle at all. So, when these leaders correct, they will take the range bound indices with them.

    Second, I don’t care how many traders are trading the markets. On many days and months, 30-50% of trading is handled by five or six large organizations. If they decide to all sell, you can kiss your ……. This isn’t just a statement for the US. On a typical day, as an example, more than 50% of the trading volume in the Nikkei comes from OUTSIDE OF JAPAN. This is big US money of which I am referring to above. They are propping up all markets.

    Third, the concept of equilibrium in financial markets is a paradox and not sustainable. See #1. The theory behind Bernie’s statement plays directly into what Barry just posted. The general thinking is that sentiment gets too bad and the bulls step in to buy, thus putting a floor. Then if the sentiment gets too bulish, we put a ceiling in and traders sell. This situation will resolve itself and I am 110% confident of that fact. Next week? next month? next year? It will happen.

    I could prattle on forever but Bernie Schaeffer isn’t worth the prattling.

  22. doh! commented on Aug 29

    Just keep in mind that Bernie is a marketer and not a successful option player. If he could actually trade, he would be Soros and not Bernie. For proof, his protege was recently on MSN for the quarterly trading competition and she was crushed (came in last and lost money I believe). Alaska Pete probably makes money and look how secretive that dude is!!!!

  23. Michael C. commented on Aug 29

    >>>If you owned the right indices or the right stocks, this has not been a range bound cycle at all.<<< That's data mining to back up the argument. >>>On many days and months, 30-50% of trading is handled by five or six large organizations. If they decide to all sell, you can kiss your … <<< What's your source of this 30-50%? Moreover, what of the other 50-70% and why are you discounting them? Positino: Neutral on BDG123 and Bernie Schaeffer.

  24. BDG123 commented on Aug 29

    Data mining? Do you even know what data mining is? That is quantitative analysis and any clueless bozo with a calculator could have figured it out while it was happening.

    My source? Why don’t you go to and look at the percent of program trading then go look at percent of top market participants.

    Positino: Michael C. needs to know what he is talking about before he throws barbs

  25. RW commented on Aug 29

    Peter Navarro wrote a somewhat uncomplimentary article about Bill Gross ( yesterday that purported to account for Gross’s rather poor record as a forecaster the past few years with an explanation akin to what Schaeffer’s may have been viz “…we can no longer view domestic stock markets as leading indicators of domestic economies.”

    Personally I enjoy reading Gross because he promotes some interesting lines of thought but always assumed that, like any money manager, he was talking his own book so I never took what he said as advice but never mind that.

    The notion that increased global money flows will somehow flatten markets makes me uneasy; it seems just as likely they could make moves explosive. Take a simple (and oversimplified of course) 2-variable case with 4 possibilities: (1) Foreign + domestic demand for equities high; (2) foreign demand high, domestic demand low; (3) foreign demand low, domestic demand high; foreign demand low, domestic demand low.

    Without actually trying to quantify this, one could imagine (2) or (3) leading to a rather flat general market because international and domestic money flows might tend to offset each other somewhat although it seems equally likely, following ‘B’s’ point, that specific sectors finding international favor or disfavor would still show stronger moves.

    Cases (1) & (4) though imply something much stronger overall one way or the other so, logically, there’s a 50% chance the handle could really come flying off. Not sure that logic is sufficient in the real world but it none-the-less causes me to doubt that the impact of global money flows can be characterized easily.

  26. M.Z. Forrest commented on Aug 29

    I think that is a reasonable hypothesis, that the DOW or the S&P 500 no longer reflect the American economic condition. For example, Wal-Mart’s income statement is far more dependent upon the cost of goods they purchase in China than any domestic levers. On the opposite end of the spectrum, Boeing’s fortunes are far more determined by the willingness of foreign entities to by their planes than by current economic conditions. In fact, one could argue that a recession in the US would be good for Boeing, because they would more easily be able to reduce their production costs. (One would have to discount a US recession’s effects on the global economy for that to work.) Regardless, your typical conglomorate today tends to reflect the global condition and not necessarily the US.

  27. Alaskan Pete commented on Aug 29

    Secretive? Wha? Only things I’m secretive about are my prime fishing spots and the location of my garden of Matanuska Thunderf#$* and super skunk.

    Seems that sentiment is the topic dejour. I’d look to mutual fund cash levels and other more quantitative measures of sentiment. We know how poorly consumer sentiment measures correlate to actual consumer spending. I think these subjective sentiment measures are all flawed except at extreme levels.

  28. Michael C. commented on Aug 29

    >>>Data mining? Do you even know what data mining is? That is quantitative analysis and any clueless bozo with a calculator could have figured it out while it was happening.

    My source? Why don’t you go to and look at the percent of program trading then go look at percent of top market participants. <<< Still unclear what you are getting at here. My point was you said "if you owned the right stocks then..." Well, the converse could be true just as well to make your point moot. As to inquiring about your source, that's what it was - an inquiry not an argument. Still you didn't state exactly what the significance was of 30-50% of the market being traded by 5-6 orgs. You use the word "if" here again, and the converse could again be used. If they decide to sell, sure the market goes down. But if they decide to buy, then the market goes up. Voila. And what of the other 50-70% of the market?

  29. saltwater commented on Aug 29

    I know a Pete in Fairbanks, he’s even in the financial industry. Your post’s seem far too intelligent to be the same guy as I have always considered him a dipshat. (crossing fingers). Hope I’m correct.

    have you moved yet?

  30. there they go again commented on Aug 29

    You have the wisdom of crowds and the madness of crowds. Since both happen yo can always appeal to one or the other to justify a view.

    Mass psychologies certainly do reflect and shape social events, but the relationships are complex.

    One indicator is degree. In 1999 it was a mania, if you go to the Daily Reckoning it’s the sky is falling, but the pessimism I see now is guarded, pointing to real problems and not necessarily predicting the next great Depression.

    Politically it is considered anti Bush and pro Terrorist to be so negative, this is the best of all economies just as Iraq is the best of all possible wars. This ties in with the huckster element of the sell side and their shills in the media. I do not think that the growing distrust of this madness is a sign that the madness is true anymore than I think concern over Iraq is proof that it’s going well.

  31. ArizonaChartist commented on Aug 29

    Check out the chart this guy keeps. I too must smirk every time I hear the words “bear” and “contrarian” in the same sentence.

    My strategy is to buy fundamentally strong companies (as per the IBD ratings…who, besides Crammer err I mean Cramer has time to follow the fundamentals of hundreds of companies) with technically sound attributes (both individually and sectorally as per Dorsey Wright) on drawbacks to points where there is a confluence of support (200 DMA, major bottoms on the PNF, often-touched trend line on the bar chart, bullish support line on the PNF and oversold on a 50 DMA basis). I’m finding more and more stocks entering my buy zone.

    I agree with the author’s key takeaway that short interest is not a catalyst but rather dry kindling that will fuel an upward move. My view is that any seasonal weakness in Sept/Oct will serve only to further compress the NASDAQ spring making the eventual renewal of the bull market very painful indeed for the bears.

  32. Alaskan Pete commented on Aug 29

    Saltwater, definitely not the same guy (people up here don’t call me Pete). Haven’t moved yet, not until early Oct. Hopefully I can beat the weather.

  33. Brenda commented on Aug 30

    We like to think that we are not mingling with the others, but, in fact, this is our nature. The ones that are not in the crowd are those that don’t think to get out of it.

  34. sft commented on Oct 1

    Good lessons for all ::

    #1 there is a huge gap between market analysis and trading markets to make money.

    #2 There is no relationship between being “right” and making money.

    #3 While markets are not predictable people are.

    #4 Anything can happen in the markets so how worthwhile is a market opinion?

    #5 Having a definable game plan and following it will overcome poor analysis.

    #6 I know some very rich traders but I have yet to meet a rich analyst.

    #7 You should never give out market advice because readers don’t need your bad advice and they will ignore your good advice so don’t give them any advice.

    #8 A correct market opinion does not answer the questions of how and when do I place a bet, when do I know I am wrong, how big is my bet in terms of dollar or percent risk, and most important how do I manage my trades when they are working.

    #9 Some very smart people think the stock market is going up. Some other very smart people think the stock market is going down. Since I don’t have a clue what the stock market is going to do I totally agree with both opinions.

    #10 Managing the money and more importantly managing the trade is more important than being “right”.

    #11 A good trade is a trade which was entered and exited following one’s rules regardless of the dollar outcome be it a gain or a loss.

    #12 Most newsletters offer both sides regarding market direction. Whichever way the market goes will then be highlighted in subsequent newsletters as if the writer new what was coming.

    #13 The more negative email you receive regarding a market opinion the more you should bet.

    #14 If you receive emails endorsing your view you might want to re-think your opinion.

    #15 You learn very little “watching” someone else trade and you might very well harm yourself as a trader by following the advice of others. Be your own man or in one case lady!

    #16 Keeping a trading diary on a daily basis will teach you how you think. Be honest and don’t edit your diary in hindsight. Again trading is not about right and wrong but it is about doing and not doing

Read this next.

Posted Under