The principles of Contrarian Investing hold that when the vast majority of people agree on anything, they are generally wrong. Otherwise no market would function because there is simply no minority with money enough to make a majority rich. A true contrarian, therefore, will first try to determine what the majority are doing and then will act in the opposite direction. Market Vane, AAII and Investors Intelligence are all contrary opinion indicators.
A unique feature of Market Vane's Bullish Consensus numbers is a weighting formula applied to the various market letters. More weight is given to letters with a larger following and less weight to those with fewer readers. Each week a poll of market letters is taken to determine the degree of bullishness or bearishness among futures professionals. The theory is that when a significant number of participants are bullish, they are already positioned on the long side and there is little potential buying power left. If most participants are bearish, selling pressure has reached an extreme and prices will reverse to the upside.
Since 1963, Investors Intelligence has been compiling data on the opinions of publishers of market letters. They conduct a weekly poll of about 130 market newsletter writers and calculate the percentage who are bullish, bearish or expecting a short-term correction. The resulting index shows that the advisory services follow the trend of equity prices by becoming most bullish near market tops and most bearish around market bottoms.
The Commodity Futures Trading Commission (CFTC) provides inside information about purchases and sales of futures contracts. The largest players in each market are required to disclose their positions to the CFTC on a daily basis and this report is released weekly on Friday afternoon (the reporting requirement varies by commodity). These traders are separated into Commercial Hedgers and Large Speculators.
The positions of Small Traders are calculated by subtracting the total of contracts held by the reporting groups from all the contracts outstanding (Small Traders are not required to report their positions). Commercial Hedgers hold a significant informational edge over other traders as far as fundamental supply-and-demand statistics are concerned. They tend to be early, but they are usually right on the long run, quite contrary to the small traders. Extreme divergences in long and short positions of Small Traders, Large Speculators and Commercial Hedgers have proven to be reliable indicators of important trend changes. In such cases it is not advisable to bet against the Commercial Hedgers. All other patterns are meaningless. The following charts show you the positions of these three groups of market participants. A 10-week moving average is applied to smooth out the swings.
Three different charts are available for each commodity:Small Traders) on a percentage basis.
• Short positions of Small Traders only. Significant changes in those numbers give you
an insight about prevailing sentiment..
• The Long/Short Ratio of Small Traders. This chart is computed by dividing the long
and short positions of Small Traders. High readings indicate heavy buying by Small
Traders which is bearish.