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Category: Sentiment Updates

Smart Stock Market Investors Beware – Bullish Investor Sentiment Going Up While Corporate Buybacks Going Down

We use investor sentiment as a contrarian indicator of the stock market’s direction.  The latest Investor Intelligence Bulls/Bears poll of stock market newsletter writers shows increased bullishness, which is a negative since these writers are usually wrong. Even more worrisome for stocks is the fact that corporate buybacks, which have been the major support of the market, are down sharply, according to TrimTabs Investment Research. It reports that corporate buying has slowed significantly since August, and new announced stock buybacks plummeted to their lowest level since May 2012. What does that mean?  Bad news for stocks. Corporate executives are increasingly pessimistic about their companies’ future revenue and earnings growth, and unwilling to risk their profits buying their own stock.
Aa for the Bulls/Bears poll, bullish sentiment jumped to 50.0% from 44.9% a week ago. That 50% level means investors should begin taking defensive positions, while 55% historically means the market is in extreme danger with little cash left in portfolios to support upward gains. Other negatives are that bearish sentiment went down to 17.9%, after two weeks at 18.7%, while the spread between bullish and bearish sentiment expanded to +31.2% from +26.2% (see chart). That jump to more than +30% is another indication investors should be increasingly cautious.

Smart Stock Market Investors Beware – Bullish Investor Sentiment Going Up While Corporate Buybacks Going Down
Smart Stock Market Investors Beware – Bullish Investor Sentiment Going Up While Corporate Buybacks Going Down

Meanwhile, another note of caution comes from the direction of the Smart Money/Dumb Money Confidence Spread (see chart) derived from the action of good and bad investors. Its drop to -0.27 means it is heading from neutral to somewhat bearish.

 Smart Stock Market Investors Beware – Bullish Investor Sentiment Going Up While Corporate Buybacks Going Down

Smart Stock Market Investors Beware – Bullish Investor Sentiment Going Up While Corporate Buybacks Going Down

Wishy Washy Sentiment Numbers Mean Stock Market Investors Should Remain Cautious

We use investor sentiment as an important gauge on the direction of the stock market. The latest Investor Intelligence Bulls/Bears poll of newsletter writers show that the May and August corrections were not strong enough to create the type of negative sentiment signaling buying opportunities that traditionally occur at intermediate lows. We expect subsequent corrections will be even worse, because of the lack of market breadth that spurred recent market upticks, and a weakening economy. Bigger corrections will eventually turn sentiment negative enough to signal buying opportunities.

Meanwhile, the recent poll shows the spread between bulls and bears at a neutral 26.2%. Bullish sentiment was at 44.9% and bears at 18.7%. For contrarians, that low bear reading means this is not the time for major buying since there’s little cash on the sidelines to spur future stock market growth. In other words, we seem to be in a lull before the storm.

Wishy Washy Sentiment Numbers Mean Stock Market Investors Should Remain Cautious
Wishy Washy Sentiment Numbers Mean Stock Market Investors Should Remain Cautious

Stock Market Sentiment Indicators Continue to Advise Caution

We use Investor sentiment as contrarian indicators of market direction. While short-term indicators are no longer oversold, suggesting the possibility of short-term bounces, the real story remains with the intermediate-term indicators. They suggest stock market investors should remain cautious, with no stock market bottom in sight, particularly in this period of high volatility and global economic and political uncertainty. We should also note that another bad sign for the stock market is that the weekly trading breadth remains very negative and new stock lows outnumbered new highs for the second week.

As for intermediate investor sentiment, The Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment barely changed to +31.2 from +31.4% last time (see chart). A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another contrarian warning sign for investors from this poll is that the group of advisors projecting a correction remained heavily in the minority,  barely moving to 33.0% from 32.4%.

Stock Market Sentiment Indicators Continue to Advise Caution
Stock Market Sentiment Indicators Continue to Advise Caution

Stock Market Sentiment Indicators Advise Caution

We use Investor sentiment as contrarian indicators of market direction. It comes as no surprise that the CNN short-term Fear/Greed Index (see chart)  registered extreme during this week’s market turmoil. That. from a contrarian point of view, indicates there’s a possibility of some short-term market bounces.  However, intermediate-term gauges are telling investors to remain cautious. There’s certainly no indication that a bottom has been reached despite the big drops.

Stock Market Sentiment Indicators Advise Caution
Stock Market Sentiment Indicators Advise Caution

The Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment expanded very modestly to +31.4% from +30.2% last time (see chart). A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another contrarian warning sign for investors from this poll is that the group of advisors projecting a correction contracted to 32.4% from 34% the previous week.

Stock Market Sentiment Indicators Advise Caution
Stock Market Sentiment Indicators Advise Caution

Investor Sentiment Indicators Still Warning Stock Market Investors to be Cautious

We use investor sentiment as contrarian indicators for guidance on market direction since the average investor tends to buy and sell at the wrong times.  Although the indicators show that this week’s tremendous volatility frightened some investors into being more cautious, the move away from more bullish sentiment in the previous week was not enough to signal a bottom has been reached.  Instead, the indicators were warning that caution remains the watchword in this highly volatile climate – a climate which tends to confuse investors even more than usual.

For instance, the Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment contracted to 30.2% from last week’s 40.1%. A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another warning sign for investors in this poll is that although the percentage of advisors projecting a correction moved to 34.0% from the previous week’s 25.7%, that still indicates very heavily invested positions by the editors and their followers. And that means limited cash to help power markets higher.

Investor Sentiment Indicators Still Warning Stock Market Investors to be Cautious
Investor Sentiment Indicators Still Warning Stock Market Investors to be Cautious

Another note of caution comes from a weekly member survey by the National Association of Active Investment Money Managers. It shows that the advisors responding to the survey also had very little cash reserves to help power a correction, with  91.4% of their portfolios invested in stocks (see the chart below).  The chart, which also includes the S&P 500, shows that stocks tend to move down around the time these advisors become heavily committed to stocks.

Investor Sentiment Indicators Still Warning Stock Market Investors to be Cautious
Investor Sentiment Indicators Still Warning Stock Market Investors to be Cautious

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