Volume

Isn't the 10 day moving average 18.06% below the 200 day moving average or are my math skills totally in the toilet? I put in pink and green bands to correspond roughly to what Goefert used as break points. I don't have on this chart is the slope of the S&P 500, but I believe it's 200 day ma started to decend beginning in mid January.

Buy/Sell Confidence Model

The chart above is a screen grab of Jason Goefert's Buy/Sell Confidence Model (aka Smart/Dumb Money Confidence Model) 2001-2006. This is one of the few models that Goefert doesn't disclose his data sources, but my guess is he is using Rydex/Proshares Fund Asset Flows of index funds and/or CBOE Commitment of Traders data for stock index futures.

I added the red and green bands in Photoshop to more easily visualize the model's behavior in relation to the S&P 500. The dark green bands indicate periods where the model was oversold, the dark red bands indicate periods of over-optimism. The lighter bands indicate periods one month after the model reversed course from an extreme level.

This chart is highly instructive of how most sentiment indicators behave.

1. Market indexes can continue to rise/fall after models reach extreme levels
2. Model reversals are a more reliable indicator of a market reversal
3. Sentiment models do not always reach extreme levels at market tops/bottoms. They aren't closed buy/sell timing models in and of themselves.

I use sentiment models/indicators to counter simple trend indicators. If you've ever experimented with technical indicators such as moving averages you'll know trend indicators are always wrong at both peaks and troughs. By balancing trend indicators with sentiment indicators you can create a timing model that is "less wrong" at key turning points. For example, instead of being 100% in cash at a market bottom, your combo model might suggest you only be 70% to 80% in cash.

I'm not looking for perfection here. You can see that although this model is a great tool, it isn't perfect...and it certainly cannot predict market prices. The purpose of a timing model imho is to reduce portfolio volatility, not to deliver outsized gains. If it ends up doing the later, great...consider it icing on the cake.