Market's Sentiment Tools Proved Crowd Wrong At Key Junctures; Herd On The Street.(A)

Byline: CRAIG SHAW

When the crowd yells fire, sit tight. That's the approach of investors who use psychological indicators to flag market shifts.

Sentiment gauges are contrarian. The herd is usually wrong at market extremes. When investors see riches ahead, stocks may be close to topping. When panic takes hold, a rally may be in the wings.

Like everything about stocks, these gauges were put to the test during the worst bear market since the Depression. With a lasting rally now seemingly in hand, it's worth looking back to see how they fared in spotting the market's October bottom, its deepest trough in more than six years.

"They worked extremely well," said money manager Don Hays of Hays Advisory Group. "They're as good as they've ever been."

The put/call volume ratio compares the number of bearish put options to bullish calls. When it spikes above 1.0, most option players think stocks will fall. Since they're usually wrong, this gauge often coincides with a rally.

The S&P 500 put-call ratio and equity put-call ratio both worked well in flagging the market's October lows, says Al Goldman, chief market strategist for A.G. Edwards. So did the percentage of short sales, he says.