INVESTOR'S INTELLIGENCE RESULTS IDENTIFY BULLS AND BEARS AND ARE A CONTRARY INDICATOR

Throughout our last several Swing Trader issues I've brought you an educational series on how to read the signals given off by the overall market. So far we have discussed six major market measures: New Highs and New Lows, the Advance/Decline Line, the Arms Index (or Trin), the McClellan Oscillator (and the associated Summation Index), the Put/Call Ratio and the Volatility Index.

Each of these measures gives the swing trader new information. New Highs and Lows and the Advance/Decline Line are long-term measures. They help the swing trader judge the market's overall health. The Arms Index and McClellan Oscillator describe whether the market is overbought or oversold in the short term (and therefore prone to a reversal). The Volatility Index and its cousin, the Put/Call ratio, are sentiment indicators. Sentiment indicators describe the current level of bullishness or bearishness in the market.

Another important sentiment indicator is the Investor's Intelligence survey of market advisors. Each week Investor's Intelligence surveys approximately 150 market newsletter writers. They take this survey on Friday and release the results to the media the following Wednesday. These results can then be charted. Over time, astute swing traders can use this data to judge abnormal peaks in bullish or bearish sentiment.

Like other sentiment indicators, the Investor's Intelligence figure is thought of as a contrary indicator. This is because the majority of investment advisors tend to trade with the prevailing trend. As the market becomes more bullish, their newsletter outlook and picks come increasingly from the long side. As the market declines, they will increasingly advocate a bearish position. Most of the time these investment advisors are correct. However, at major market turning points they can lag the market. It is in these scenarios that the Investor's Intelligence survey can provide traders with a contrary indicator.

The manner in which the survey is calculated is pretty straightforward -- bullish and bearish advisors are tabulated and the numbers in each camp are totaled together. The end result of this process is a percentage value -- the % of advisors who are bullish on the market's near-term prospects.

Traders can interpret the Investor's Intelligence survey figures in a number of ways. If less than 40% of advisors are bullish, then that is often seen as a positive. After all, the trend followers are likely to be incorrect at important reversals. Meanwhile, a reading between 41% and 54% is considered neutral. Survey results of over 55% bulls tend to be bearish and warn of an eventual market top.

In addition to this analysis, traders can analyze the data by examining the ratio of bullish to bearish advisors. Generally, peaks of more than 2:1 are a warning of vulnerable markets. Of course, note that extremes in advisor sentiment are a lagging indicator. In other words, they peak or trough well in advance of a market turn. Their value is that they send a long-term warning that a reversal may be afoot.

Since advisors and the market itself tend to always have a bullish bias, the extreme numbers vary for bearish readings. If more than 50% of advisors are bearish, then that's a contrarian signal and is read bullishly. Between 21% and 49% is a neutral reading. And finally, if less than 20% of advisors are bearish, then this is seen as a negative signal. Note that the bullish and bearish advisors, when totaled, do not add up to 100. The reason for this is that a certain percentage of advisors are often in the correction camp. Therefore, they are not counted as either bullish or bearish.

Remember the observation I have made previously in this newsletter that an S&P close below 1091.33 would be a bear market signal and that the McClellan Oscillator Summation Index is now in bear market territory? Well, careful traders should read the current Investor's Intelligence figures with this context in mind. First, the number of bullish advisors is still 46%. That is down from near the 60% reading scored in late 2003 and early 2004. Given the market's vulnerability, that number, however, is still very high. The bearish advisors total is at 23.7%. Note how low that figure is compared to readings over the last several years. Even at the peak of the bubble years in 2000 the number of bears was generally greater than 30%!

Also observe the bullish to bearish advisor ratio of 1.96. We have seen two recent spikes in this data to about 3.00. The last time the ratio was that high was in 1992 -- 12 years ago! Spikes of this kind are associated with extremes in bullish sentiment and in the past have at times preceded an important market top. While the ratio is now below 2.0, it is still very elevated. It is approximately what it was at the peak of the bubble years in 2000.

When combined with the McClellan Oscillator Summation Index and an analysis of the new highs/new lows and Advance/Decline line (I've discussed all of these in recent issues), the Investor's Intelligence figures provide us with yet another potentially worrisome indicator that the stock market may be entering into a stage III top and that this bull market may be coming to an end. As I've recently argued, swing traders should be alert to this potential reversal in the Primary trend since it will dramatically affect trading strategy.

Income Security of the Month If you're looking for high yields, monthly payments and unprecedented safety from your investments, then you need to learn more about our "Income Security of the Month" for November 2008. This stable preferred stock has a long track record of paying some of the most solid dividends in Wall Street history. In fact, the preferred issue pays a monthly dividend totaling 10.3% annually and has outperformed the S&P 500 by more than +44 percentage points over the last year!

Top 10 Stocks for 2008! Since we began publishing this report back in 2003, the picks we've featured have consistently beaten the broader market -- delivering average gains of +21.3% per year and outperforming the S&P by a nearly 2-to-1 margin. Act now to reserve your copy of our newest report -- Top Ten Stocks for 2008.