PUBLIC OPINION - COMMODITIES (CRB INDEX)
APPLICABLE TIME FRAME(S):
INTERMEDIATE / LONG
UPDATE SCHEDULE:
Every Wednesday
EXPLANATION:
This indicator is just like all the other "Public Opinion" indicators we post for commodities, but with one difference. First, we'll explain what the indicator is, then we'll explain exactly how this one is different from the others.
The theory behind this indicator is that when they reach a consensus of opinion, the public is usually wrong - they get too bullish after prices have risen, and too bearish after they have already fallen.
Because of that tendency, we very often see extremes in opinion right before major changes in trend. When the public reaches a bullish extreme - a great majority thinks prices will keep rising - then we most often see prices decline going forward instead. And when they become too bearish, then prices tend to rise.
To calculate this gauge of public opinion, we have created an index based on many of the established surveys currently in existence, some of which are noted below. We have looked at the history of the surveys to determine how accurately they have measured extremes in the past, and weighted their influence in our indicator appropriately based off that analysis.
The interesting thing we discovered in doing that analysis is that no matter what population the survey monitors, it tends to correlate very highly with all the other populations. In other words, people tend to think alike, and it's rare to see any of the surveys diverge too far from all the others. The correlations among them are very high, and have been consistently so for many years.
Now, what makes Public Opinion - CRB different?
There are very few gauges of how people feel towards commodities in general - usually the focus is on individual contracts. So what we've done is take each of our Public Opinion indicators and combine them into one, general outlook on commodities.
To do that, we used the weightings used by the Commodity Research Bureau to calculate their CRB Index. Like the Dow Jones Industrial Average for stocks, the CRB Index is the de-facto standard when traders talk about commodities.
Until recently, most of the individual contracts were evenly weighted in their index. In 2005, however, the CRB changed the weightings to more heavily favor energy. In order to better reflect overall commodity-market sentiment, we did not increase the weight of energy in our calculations and instead left them equally-weighted.
With many new commodity-related ETFs being rolled out each year, it's now easy for traders to trade "commodities" in general, or more specific sub-groups within the asset class. Visit ETFConnect.com or enter "commodity ETF" in a search engine to get a list of tradeable commodity-related ETFs.
GUIDELINES:
Like most surveys of public opinion, this one is a contrary indicator. So when folks become too bullish, we should look for general commodity prices to stall out or decline; when they are too bearish, we should look for rallies.
Using strict "overbought" and "oversold" levels tends to not work so well in this regard. Saying that the public is too pessimistic because only 20% of them are looking for higher prices is too general. In some commodities, we don't see that kind of extreme for stretches of five years or more - meaning we could have possibly missed out on numerous buying opportunities.
We prefer to use a relative measure of extreme, that being 1.5 standard deviations from a one-year moving average. So when Public Opinion moves above the red dotted line in the chart, it means that compared to other readings over the past year, we're seeing a statistically extreme value. You also want to look at the absolute level of Opinion, too - if it's at 90%, then there's no question we're seeing an historic level of bullish opinion. Watch for readings above 80% (or especially 90%) to spot those dangerous times when the public is overly enthusiastic about a commodity.
Conversely, when Public Opinion moves below the green dotted line, then the public is too pessimistic about the commodity's prospects for further gains compared to their opinion over the past year. Looking for absolute readings under 20% (or especially 10%) can lead to good longer-term buying opportunities.
ADDITIONAL RESOURCES:
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