Do measures of investor sentiment predict returns?

It has long been market folklore that the best time to buy stocks is when individual investors are bearish. We examine the forecast power of three popular measures of individual investor sentiment: the level of discounts on closed-end funds, the ratio of odd-lot sales to purchases, and net mutual fund redemptions. Using data from 1933 to 1993, we find evidence that fund discounts and net redemptions predict the size premiums, the difference between small and large firm returns, but little evidence that the odd-lot ratio predicts returns.