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As Stock Market Keeps Rising, Sentiment Gauges Keep Ringing Alarm Bells

As Stock Market Keeps Rising, Sentiment Gauges Keep Ringing Alarm Bells. We use investor sentiment indicators as historically accurate contrarian indicators on the direction of the stock market.  Those indicators have been sending increasingly worrisome signals in recent weeks as the stock market keeps going up to new highs. Why the disparity? That’s because it is difficult to predict exactly when a directional change will occur.. Nevertheless, these  gauges are worth heeding in terms of taking defensive measures as stock prices get overbought by historical measures, and investors get increasingly irrational.  Right now, according to the Investor Intelligence, its indicators are warning of a pullback, at least for the short term.

As Stock Market Keeps Rising, Sentiment Gauges Keep Ringing Alarm Bells
As Stock Market Keeps Rising, Sentiment Gauges Keep Ringing Alarm Bells

The  Investors Intelligence Bulls/Bears most recent survey of the sentiment of more than 100 stock market newsletters shows “the market advance increased the bullish sentiment and trimmed the number of long-term bears.” Investor Intelligence points out: “ Those readings call for new caution. In the survey the bulls advanced to 58.1%, after a small dip to 56.7% the previous week. By historical measures, bullish sentiment above 55% calls for defensive measures. That means “tight stops at the minimum and possibly some selling among shares with big gains” , says Investors Intelligence. Bullish sentiment as it climbs over 60% means increasing danger and to prepare for a market decline.

Meanwhile, the bears dropped to 16.2% from 17.3% the previous week. That is the fewest bears since early Mar 2018, “and just below the narrow range of 17%-19% that held over the last nine months of 2019.” Very low bearish readings mean this is not the time for major market commitments.  So, remain cautious. Remember, sentiment top signals can come months before markets decline. But those who wait too long end up the biggest losers.

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Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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