Birinyi Assoc. reviewed the effectiveness of the Yale School of Management “Crash Confidence” Index measuring the percentage of institutions that saw less than a 10% chance of a market crash in the next 6 months. Fortunately, Birinyi’s findings are that the indicator is a pretty decent contrary indicator.
The S&P 500 has on average been down only 6.1% at the lowest point during the 6 months following a spike in fear ( a sharp drop in the crash confidence line on the following chart). The only point where the signal might be considered accurate was following the Oct 2001 drop in confidence. The S&P 500 was up 6 months later but went on to drop 29% in the following 6 months. Jeb Terry, Sr. May 25, 2012
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