Wednesday, July 28, 2010

Double Dip Fears

I saw this chart a few weeks ago, although I cannot remember where, and brushed it aside. But I felt compelled to recreate it today after sifting through some sentiment indicators. Sentiment Indicators are used in technical analysis to gauge investor attitudes toward the market. They allow a market observer to quantify the level of optimism or pessimism in the market. The chart below is not a typical sentiment indicator; however, I think it accurately conveys the level of pessimism that is present in most retail investors today.

The chart is called a Google Insight, which is basically their label for searching searches. You can type in any word or phrase you want to see how many times it’s been searched using Google. In this case, I put in the phrase “Double Dip Recession.” You can see on the chart that the popularity of that search has skyrocketed over the last month, and in fact, it was the most searched phrase by the end of June. (To read the numbers, you divide the searches for your word by the searches for the most searched word. That percent is then graphed.)

The fear in the market was extremely high at the end of June based on these results. “Double dip recession” was used repeatedly by pundits in the financial media, and even we used it on a recent conference call with clients. And when the public ran with this fear, it proved to be a good opportunity to purchase stocks. The near term bottom in the stock market was July 1st, and since then the market has gained roughly 10%. This is a great example of how contrarian investing works.