Is Yale's 'Buy-on-Dips Confidence Index' Sending a Message?

The Yale School of Management publishes a series of Stock Market Confidence Indexes that attempt to gauge individual and institutional sentiment toward the stock market. Each of the four gauges -- One Year Confidence Index, Buy-On-Dips Confidence Index, Crash Confidence Index and Valuation Confidence Index -- plots the six-month average of monthly responses to four different survey questions.

Like many investor confidence polls, responses tend to loosely track what's happening in the overall equity market. When share prices are on a roll, for instance, confidence tends to steadily increase and vice versa, until sentiment reaches what might be described as a contrarian extreme.

However, something unusual seems to be happening in regard to one of these gauges, The Buy-On-Dips Index, which tracks the "percent of the population expecting a rebound the next day should the market ever drop 3% in one day."

Since January of 2009, the individual and institutional response trends have diverged to the point where the gap between the two is as wide as it's been since 1999 (when Yale started consistently tracking responses from both groups of investors).

More unusual, still, is the fact that individual sentiment has been declining while institutions have remained relatively upbeat. As the chart shows, the last two times a gulf like the current one opened up was in mid-to-late-2006, when sentiment among the big boys and the little guys was falling, and in mid-2001, when individual sentiment held steady as institutional attitudes improved.

Admittedly, I haven't been able to uncover any obvious differences in the individual and institutional response trends detailed in the other three indexes. Moreover, the time frame involved is rather short, which some statisticians might take issue with. Nonetheless, the Buy-On-Dips Confidence Index divergence may go some small way toward undercutting the popular belief that the stock market won't -- or can't -- reach a peak until the little guy rushes in.