ISI (Ed Hyman’s shop) started taking a survey of hedge fund managers in June 2002. Every week, they ask how much more bullish or bearish than “normal” the managers are on a scale from 0 to 100, with 100 being their maximum bullish position and 0 their most bearish. 50, then, is neutral – but I have a devil of a time trying to remember that “50” is dead neutral, 40 reflects a much more bearish position than usual, and 60 a much more bullish one. I therefore decided to subtract 50 from each weekly number in my calculations; by doing so, 0 is “normal”, positive readings reflect more-bullish-than-normal positions and negative readings more-bearish-than-normal ones. Somehow, it’s a lot easier for me to understand that way…

And it’s a good indicator! Last fall, it reflected increasingly more bearish positions on the past of hedge funds from the July low right through early November as the S&P staged a 14% advance. (Yes, Virginia; hedge fund managers are contrary indicators too!) That, to me, was a real acid test – and the hedge fund survey passed it with flying colors.

Parameters? The survey’s all-time high was 11.3, in December 2004, and the all-time low was -13.4 on March 5, 2003. In addition, only 10% of the weekly readings have been above 7.7 and only 10% below -5.7. We also found it helpful to run a four-week moving average of the weekly data, in order to smooth it out a little.

You can see what it all looks like here.

(My thanks to ISI for so generously allowing me access to and use of their data.)

Walter Deemer

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