Contrarian investing and the Manulife Investor Sentiment Index (good for your RRSP?)

In this time where you are thinking about investing in your RRSP as the market is sinking, you might wonder what strategy to use ... although there's no clear direction, I think there's something about contrarian investing that is appealing. Contrarian investing could simply be defined as buying when everybody is selling (panic in the market) and selling when everybody's buying (exuberance in the market). One tool to identify trends before they show up in stock prices (i.e. to help sell before everything tanks for example) might be using the Manulife Investors Sentiment Index. This is only a theory and use it at your own risk!

First of all, it is currently hard to figure out where to invest, so if you need to contribute to your RRSP, you can simply make cash contributions and wait for the good time to buy.

Here's a very rough and amateur timeline of the Investors Sentiment (IS) level compared to the value of XIU (simple low-fee index ETF to buy Canadian stocks):

• 2000, the index reaches 35 before the tech bubble crash and then goes to 11 after the crash (in December 2001) ... XIU was around 44$ in March 2002 just as the IS index was going back up close to 21.
  
• July 2007, the IS index is at a near record high (highest since 2000) of 31 and XIU is around 84
  
• September 2007, XIU is around 81 and the IS is pulling back at 20 from it's recent high of 31
• December 2007, the IS index goes back to 27 as XIU is still around 81
• Today XIU is at 74 (I couldn't find the IS index value since it's only released quarterly)

It's obviously very hard to draw conclusions from this. One conclusion I'd like to propose though is that when the Investor Sentiment Index is at an historic high ( close to the 35 of 2000 ) for some period of time, it's a clear sign that the crowds are over-excited about the market and it's an ideal time to sell. And when the IS index goes to a low (let's say close to the post tech crash of 11), then it might be a good time to buy. I'll update you on the index in March and we'll see if it might be a good time to jump in the market or if it's better to hold. Something to note as well, is that the press releases seem to lag the actual polling time which does not help tracking the current situation.

Disclaimer: this is only a personal theory and not an investment strategy. Market timing is risky and you could lose a lot of money by buying or selling any stocks based on this. If you are not already a seasoned investor, please ignore this post!