Question

Is market timing possible using sentiment indicators such as put/call ratios and Investor’s Intelligence surveys?

Answer 1

The Efficient Market Hypothesis (EMH) states that all the available information totally reflects in the prices of a stock. It is based on the idea of a random walk where it is believed that prices of the stocks follow a random walk, therefore we cannot predict tomorrow’s stock price based on today’s stock price. The prices of the stock react only to the new information not to the old information and it is impossible to beat the market in long run by timing the market. Therefore it is also impossible to timing the market by using sentiment indicators such as put/call ratios and Investor’s Intelligence surveys. These indicators just help the investors make broader prospective and confirming the trends by using them. For example, a rising put/call ratio indicates that investors are pessimistic and it may lead to a downtrend in price.