THE LMTR EDGE:

Join over 25,000 investors and get alerts for:
  • Market Timing Reports
  • Sentiment Updates
  • Chart of the Week
  • Weekly Podcasts
  • The Magic Number - Top Stocks

Category: Sentiment Updates

Investor Sentiment Indicators Advise Greater Caution

We use sentiment as contrarian indicators on stock market direction.  Bullish sentiment was up among the more than 100 newsletters polled by Investors Intelligence, reaching a lofty 58% compared to 56.7% the week before. That is the third straight week this indicator has been in the danger zone of 55% and above, moving closer to 60% which historically indicates extreme danger. The elevated risk means investors should take defensive positions.

Another warning sign is that bearish sentiment in this poll fell to 16.8% from 18.3% a week ago. For contrarians fewer bears in the poll means higher risk since most of these writers and editors are fully or nearly exposed to stocks. That means limited funds for further buying. A final note of caution in this poll comes from the spread between bullish and bearish sentiment, which expanded to +41.2% from 38.4% the week before. A spread above 40% also calls for defensive action.

Meanwhile, the short-term composite indicator was up 1.70 to 72.4 (see chart), adding another note of caution for investors that the market is becoming overheated.

Investor Sentiment Indicators Advise Greater Caution
Investor Sentiment Indicators Advise Greater Caution

Finally, the Smart Money/Dumb Confidence Spread, derived from monitoring trades from historically good and bad investors,  also was telling investors to beware, dropping to -0.51 (see chart).

Investor Sentiment Indicators Advise Greater Caution
Investor Sentiment Indicators Advise Greater Caution

Sentiment Indicators Warning Stock Market Investors to be Very Defensive

We use investor sentiment on the stock market as contrarian indicators, and they are beginning to ring alarm bells.  Take, for instance, the Investor Intelligence Bulls/Bears poll of more than 100 market newsletter writers.  The percentage of bulls during the past week went up to 56.7%, from 55.2% a week ago, putting it clearly in the danger zone from a contrarian viewpoint. That is a new 2019 high and edging close to the 60% level which means extreme danger. Meanwhile bearish sentiment among this group was virtually unchanged at 18.1%. For contrarians, low bearish sentiment means big risk. The spread between bulls and bears also was flashing warning signs, jumping to 38.4% from 37.1%, close to the late April spread of 38.6% just prior to a selloff. In other words, investors should be extremely cautious, and at these levels consider selling stocks with big gains.

Sentiment Indicators Warning Stock Market Investors to be Very Defensive
Sentiment Indicators Warning Stock Market Investors to be Very Defensive

Stock Market Sentiment Indicators Suggest Investors Should be Cautious

We use investor sentiment as contrarian indicators on stock market direction. The latest sentiment indicators were moving toward overbought territory suggesting investors should be cautious. For instance, the Investors Intelligence Bulls/Bears poll of stock market newsletter writers reported bullish sentiment was becoming more optimistic, moving up to 50.5% from 48.1% last week and 42.7% before that. Bullish sentiment over 55% signals high risk and defensive action. Bearish sentiment was barely changed at 18.4% from 18.3% the week before. For contrarians, the paucity of bearish sentiment means higher risk.

Two other elements of the market signaling caution are the lack of breadth amid recent upward moves and that financials are doing so poorly. The fact that this major sector is not participating in the rally makes the rally itself suspect in terms of a true bull market.

Stock Market Sentiment Indicators Suggest Investors Should be Cautious
Stock Market Sentiment Indicators Suggest Investors Should be Cautious

Another note of caution comes from the Smart Money/Dumb Money Confidence Indicator which also is showing the market is moving toward the overbought direction it was in in the spring when it was indicating investors should sell.

Another note of caution comes from the Smart Money/Dumb Money Confidence Indicator
Another note of caution comes from the Smart Money/Dumb Money Confidence Indicator

Not Enough Bearish Sentiment to Suggest an Intermediate Stock Market Bottom

We use investor sentiment as contrarian indictors to ascertain stock market direction. Bullish sentiment in the Investor Intelligence Bulls/Bears poll of market newsletter writers dropped to 42.7% from 49% the previous week sparked by the recent correction. However, bearish sentiment barely moved, going from 17.3% to 18.5%.  Bearish and bullish sentiment historically need to be around parity before we can confidently call an intermediate market bottom.

Not Enough Bearish Sentiment to Suggest an Intermediate Stock Market Bottom
Not Enough Bearish Sentiment to Suggest an Intermediate Stock Market Bottom

Chart provided by www.investors-intelligence.com

 

Stock Market Sentiment Indicators Say It’s Still Not Time to Buy

We use investor sentiment as contrarian indicators of when the stock market is oversold and overbought because investors are historically wrong about when to buy and when to sell. The recent stock market correction has moved the indicators down from very bullish sentiment levels at market peak, but not enough into bearish territory to indicate the market has become oversold. In other words, wait before you buy.

The Investors Intelligence Bulls/bears poll of sentiment among stock market newsletter writers is a good example of what the sentiment indicators are telling us (see chart below).   Writers expressing bullish sentiment have gone down from 57% to 49%. But historically from a contrarian viewpoint that’s not nearly enough of a drop to indicate stocks have become oversold. An even greater note of caution is the fact that bearish sentiment among these writers has not budged, remaining below 18%. Typically at market bottoms, such as in 2016 and 2018, bearish sentiment among these writers has climbed considerably higher at the same time bullish sentiment has dropped much lower. In other words, as the chart indicates, it is going to take a big move upward in bearish sentiment and a greater decline in bullish sentiment to establish a firm market bottom that signals it is a good time to buy stocks.

Stock Market Sentiment Indicators Say It’s Still Not Time to Buy
Stock Market Sentiment Indicators Say It’s Still Not Time to Buy

Chart provided by investors-intelligence.com.

2018 - All Rights Reserved © LMTR, LLC

Privacy Policy - Contact Email: info@lmtr.com