By Jake Bernstein

Recurrent Patterns in “Small Trader” Stock Futures Market Sentiment: A Working Hypothesis

Visual Inspection of the Concept

by Jacob Bernstein, FSC Board Member

© 2024


Using a lengthy historical database of small trader sentiment in the stock and futures markets, we develop a working hypothesis in response to the question: Can small trader sentiment be used as a leading indicator and/or as a timing indicator for short-term, intermediate-term, and long-term trading? We discuss some of the inherent issues and offer a preliminary visual overview.

One of the most oft cited and universally believed epigrams about the stock market is that the small trader is always wrong. As in the case of most statements containing the term “always,” a red flag is invariably my first response. After many years of hearing the statement bandied about, primarily by professional traders, I concluded in the early 1980s that such a dogmatic statement warranted further investigation. Indeed, if the small trader (whoever that might be and however that might be defined) was always wrong, they wouldn’t play the game. However, if the small trader was right even a small percentage of the time at or in advance of critical market turning points, their actions could be useful as part of a trading strategy based on contrary opinion. Furthermore, a contrary opinion strategy or indicator might be developed as a “silver lining,” dependent upon the validity of this assumption. Naturally, a scientific or even quasi scientific approach to testing the validity and pragmatic issues of this assumption would be necessary prior to putting money at risk. This brief overview presents a working hypothesis of small trader sentiment as a contrary opinion market indicator in stocks and futures and provides some initial chart-based visuals of the concept.

A Brief History

The primary issue involved in testing the concept would be acquiring or developing a consistent database of small trader sentiment. In 1987, a former business partner and I initiated an informal daily survey of what we considered to be small traders in the futures markets. It became apparent that the database of respondents was constantly changing, since some people dropped in and out of the survey and others dropped out entirely. Over the course of several years, we solved that issue and began to collect what we considered to be a stable measure of smart trader sentiment.

Initially, our survey was conducted by telephone and fax machine, however, with the growth of the internet and email, we developed a procedure (currently proprietary) for collecting daily sentiment. The Daily Sentiment Index (DSI) data collection has evolved significantly with the assistance of the internet and the speed of communications.

Once we had achieved a stable respondent base, it became evident that the small trader had an uncanny ability to be the most bullish at or in advance of market tops and most bearish at or in advance of market bottoms. These two relationships became more pronounced the stronger the consensus of opinion was in one direction or another.

In the mid 1980s, a number of hedge funds and brokerage firms became aware of the sentiment index and requested subscriptions to the service. Many professional traders were impressed with its use as a contrary opinion indicator. Today, the list of DSI subscribers reads like a who's who of hedge funds. The update is a paid subscription model but note that this article is not intended to promote sales. We have made it our policy for many years not to advertise the DSI. Certainly, any individual with even the slightest market knowledge can develop their own survey.

General Observations

The DSI is presented daily in several formats. I do not provide instructions on the use of the data. That is up to the individual. However, during these days of massive demands for data, the DSI historical database is a prime candidate for deeper investigation using AI models of various types. Showing below (Fig. 1) is the daily report showing the raw data percent bullish response, the futures market name, and various moving average manipulations of the raw data.

Here are some very general conclusions about the DSI based solely on a visual comparison of price vs. DSI trends and extremes. I have included a number of price charts with the DSI on the lower part of the charts. I have marked some significant points (vertical lines) to illustrate the concept. Note that the raw DSI has been slowed with a small simple moving average in order to smooth a frequently volatile small trader response to market volatility.

  • Raw DSI readings of 80% or higher tend to correlate with and or lead market tops
  • DSI readings of 20% or lower tend to correlate with and or lead market bottoms
  • DSI sentiment tends to correlate with market direction except at extreme sentiment readings

Daily Sentiment Index 2022

Figure 1: The DSI daily report

ES-057: E-Mini S&P 500 Cont Liq. @CME (Weekly bars)

CL3-057: Crude Oil NY (Elec) Cont Lig @NYMEX (Weekly bars)

ZS-057: Soybeans CBT (Elec) Cont Liq @ CBOT (Weekly bars)

HG3-202405: Copper HG NYMX (Elec) May 2024 @NYMEX (Daily bars)

NQ-057: E-Mini Nasdaq 100 Cont Liq. @CME (Daily bars)

BTC-055: CME Bitcoin (USD) Cont 1st @ CME (Daily bars)


I am not a statistician. I do not claim to have presented hard statistical evidence in support of my working hypothesis. However, this is the first step in investigating a concept that has long been espoused by the trading community. Unfortunately, there have been no hard statistical tests of the pervasive belief that the small trader is always wrong. This initial examination is the first step in the process of determining the veracity of this widely held belief. But moreover can we employ the concept as a contrary opinion timing indicator? More to follow.


Jake Bernstein, FSC Board Member

Jake Bernstein has been publishing Jake Bernstein's Weekly Futures Trading Letter since 1972 and trading futures and stocks since 1968. His forecasts and opinions are quoted regularly in the financial press and on financial websites, and he is frequently interviewed on radio and television throughout the U.S. and Canada, including Wall Street Week, CNBC, JagFN.TV, and In addition to speaking extensively in the U.S., Canada, Europe, and Asia, Bernstein is a consultant for investors, traders, industry, financial institutions, short-term traders, brokerage firms, and commercial firms. Floor traders, professional traders, money managers, hedgers, and traders, both new and experienced, subscribe to his market advisory services. Bernstein is based in California, U.S.