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<h2>Identifying Market Reversals with Investor Psychology</h2>
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<p>When investor psychology reaches an extreme, either bullish or bearish, it often marks a key turning point in the stock market.  Yet, identifying when psychology reaches an extreme can be challenging.  Most of the widely accessible gauges of investor sentiment are unsuitable for long-term investors due to their high degree of volatility (noise) and limited historical track records, while anecdotal evidence of extreme sentiment can be misleading as it pertains to the market as a whole.  Consequently, we created the InvesTech Investor Psychology Barometer (IIPB) to measure investor sentiment in a way that better fits our long-term strategic investment approach.  </p>
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<p>Our InvesTech Investor Psychology Barometer contains five complementary and historically reliable components that gauge when investor sentiment reaches either optimistic exuberance or pessimistic gloom.&nbsp; When our IIPB reaches a reading of extreme optimism, it typically precedes a market consolidation or a bear market.&nbsp; Conversely, a reading of extreme pessimism indicates that selling pressures are nearing exhaustion and that a buying opportunity is likely at hand.</p>
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<p>So how should our IIPB be used in practice? &nbsp;Here are three tips that will help you put this tool to its best use:</p>
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<ol type="1"><li><strong>Wait for a trend reversal. </strong>&nbsp;Investors can stay highly optimistic or pessimistic for extended periods of time.&nbsp; Just because the IIPB has entered one of the extreme zones doesn’t mean a reversal in the market is immediately forthcoming.</li><li><strong>Look at other indicators for context. </strong>&nbsp;Readings of extreme optimism can lead to a variety of outcomes, from mild consolidations to vicious bear markets.&nbsp; Putting IIPB readings in the context of our other technical and macroeconomic tools will help you gauge what the most likely outcome is for any given reading.</li><li><strong>Recognize that sentiment never peaks or bottoms at the same level twice. </strong>&nbsp;One of the most common problems with sentiment gauges is that they never peak or bottom at the same level at bull market tops or bear market bottoms.&nbsp; We have normalized the data in the IIPB to help remedy this problem, but there is still no <em>magic </em>number that can definitively mark the beginning or end of a cycle. &nbsp;Even so, having an awareness of the trend in investor sentiment can be an invaluable resource at turning points in the market cycle.</li></ol>
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<p>Psychology on Wall Street provides valuable insights into the opportunities and risks in the market at any given time, which makes our InvesTech Investor Psychology Barometer an important tool in crafting a “safety-first” investment strategy.</p>
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