NEW YORK (CNN/Money) -
With the Nasdaq slithering around at levels last seen way back in 1997, some chastened tech investors are now starting to wonder if they should pack it in and throw what remains of their retirement nest egg into something safer -- like a tin can buried in the backyard. Don't laugh: So far this year, money buried in tin cans has outperformed the Nasdaq by some 25 percent.
To those with a contrarian bent, though, this much pessimism spells possible opportunities. When investor sentiment hits extreme levels -- on either end -- it's often a sign that the market is about to lurch dramatically in the opposite direction, zigging at the exact moment most investors expect it to zag. A lot of tech investors were feeling pretty cocky in early 2000 -- just before the Nasdaq began its long slide. And they were feeling pretty gloomy last September -- just before the markets began a sharp (if ultimately short-lived) rally.
Contrarian investors tend to keep their eyes trained on a number of key indicators of investor sentiment. At the moment, most if not all of them are giving some pretty negative readings -- which in the bizarro world of contrarian investing is a good thing.
Consider, for example, a gauge of sentiment called, with admirable clarity, the Index of Investor Optimism. Last month the index, a joint project of UBS and the Gallup Organization, sank to levels not seen since September's lows. Only 38 percent of investors polled by UBS/Gallup said they were optimistic about the market's prospects over the next year, down from 46 percent in May. This equates to an index reading of 72. Don't ask me how they calculate these numbers: The key here is that this is the lowest score since the gauge hit its absolute nadir of 50 back in September.
By contrast, the index stood at a relatively complacent 121 back in March -- before the markets began their recent slide. The index, which dates back to 1996, hit its all-time high of 178 -- reflecting extreme optimism -- in early 2000, only a few months before the Nasdaq hit its own all time high of 5,000. (You can find out more about the index on UBS' Web site.)
Other gauges of investor sentiment similarly suggest considerable levels of pessimism. Several widely followed indexes track the "implied volatility" of widely traded options linked, respectively, to the S&P 500 and the Nasdaq 100. In essence, these indexes measure investor nervousness -- which tends to go down when markets are rising and investors are complacent, and up when markets are plunging and investors get scared. Contrarians see extreme readings on these indexes as a sign that markets may be about to reverse.
As the markets slid Tuesday, the VIX (which measures the "implied volatility" of S&P 500 options) shot up 3 points to 34 -- that is, into a range that suggests historically high levels of nervousness. Meanwhile, the QQQ Volatility Index (which measures investor nervousness about options linked to the Nasdaq 100 index) moved up a few points to 53. Both indexes have spiked higher in recent weeks -- which could signal bullish times to come. Still, neither index is sending a screaming "buy" signal: Both are well shy of the extreme levels they hit last September just before the big fall rally.
I'm not sure we've quite hit a bottom just yet -- much less the bottom -- but I've got to think we must be getting close. Unless, of course, my tentative feelings of bullishness are themselves a contrary indicator.
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