We use investor sentiment as a contrarian indicator of the direction of the stock market. And this week’s low bearish sentiment means investors should be cautious. The most recent Investor Intelligence Bears/Bulls poll reports bearish sentiment at a very low 17.2%. Virtually unchanged from the previous report. Bearish sentiment below 20% historically means the market has not bottomed for broad buying.
Meanwhile the difference between bullish and bearish sentiment narrowed to +30.4%, which was better than previous polling but still in the cautious zone (see chart). Bullish sentiment tumbled all the way down to 47.6%, from 55.3%, but given high market volatility and low bearish sentiment we believe caution remains the watchword.
Investor Sentiment Warning Stock Market is Entering Danger Zone. We use investor sentiment as historically reliable contrarian indicators of the stock market’s direction. The Investors Intelligence Bulls/Bears poll of newsletter writers moved slightly higher this week in the danger zone with 55.3% of the writers bullish. This is up from 55.1% a week ago, and 43.9% in late August. Bullish sentiment above 50% is worrisome. Bullish sentiment over 55% suggests investors start taking defensive measures, including selling shares with large gains. It is important to note that bullish sentiment was over 55% for the four weeks preceding last summer’s August selloff. Bearish sentiment at 17.1% this week also was a warning sign, matching the mid-July low bearish readings preceding the August selloff.
The spread between bullish and bearish sentiment was up slightly to +38.2% from 38.3% the previous week (see chart). Both sentiment readings are deep within the caution zone, nearing the levels of over +40% in late July just prior to the August selloff. Our conclusion? Be very careful!
We use investment sentiment as a contrarian indicator of where the stock market is headed. This past week we had increased investor optimism. This means the stock market has become very risky. In fact, the Bulls/Bears poll of newsletter writers and editors suggest the stock market entered the danger zone.
Bullish sentiment among these writers, who historically are wrong, moved up to 55.1%, from 53.8% a week ago, and 43.9% in late August. Bearish sentiment also was worrisome. Bearish Sentiment moved down to 16.8% from 17.0% last week. The bull-bear spread (see chart) expanded to 38.3%, from 36.8% a week ago, well into the warning zone. Advisors in this poll projecting a correction continued down to 28.1%, from 29.2% last time. Correction readings below 30% are a concern. They indicate these editors are heavily invested.
We use investor sentiment as a contrarian signal on the direction of the stock market because historically investors have been wrong. The Red Flags caught our attention when bank of America this past week released a survey showing large investors have become 17% overweight on U.S. equities. That’s one of the most aggressive position in the last four years. However, we should note that there’s mixed results on drawing a firm conclusion from this survey. While the investors were very overweight, and therefore wrong, at the market peak just before the big market slide last fall, they also were equally overweight, and therefore right, on stocks at the 2016 market bottom.
So what will it be this time? For one thing, there was a major swing to overweight 17% since August. That means these big investors may have been lulled into a false sense of complacency. There’s also a longer-term warning sign for this survey. Since 2007 when these money managers were more than 15% overweight. The annualized return of SPY was -25.2% some 27% of the time.
What’s also worrisome is that the swing to overweight by the big guys comes at a time when other historically reliable contrarian sentiments indicators have trended to very optimistic. For instance, the Investors Intelligence survey of writers of investment newsletters shows bullish sentiment moved up to 53.8% from 50% the week before and 43.9% in late August. Bullish sentiment over 50% is a warning sign. It is over 55% calls for major defensive measures. Bears were down slightly to 17% from 17.9% the previous time and 18.7% the two weeks before that. More bearish signals from a contrarian viewpoint? The bulls/bear spread widened to 36.8% from 32.1%. This moved the indicator into the caution zone (see chart). In addition the percentage of these advisors predicting a correction moved to 29.2% from 32.1% the week before and 37.4% in late August. Anything below 30% is a warning sign.
We use investor sentiment as a contrarian indicator of the stock market’s direction. Smart Stock Market Investors Beware. 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.
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.