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Extremely Bullish Investor Sentiment on Stock Market Flashes Danger Signals

Extremely Bullish Investor Sentiment on Stock Market Flashes Danger Signals. We use investor sentiment as a contrarian indicator for stock market direction, and here’s why we are concerned.  The Investor Intelligence poll of more than 100 newsletter writers reports bullish sentiment climbed this week to 58.9% from the previous 57.7%. That’s the highest level of bullish sentiment since the end of the summer 2018 when bullish sentiment exceeded 60%. And that preceded an October selloff in which the S&P 500 experienced its worst month since September 2011. Historically bullish sentiment above 55% is a signal investors take defensive measures, such as tight stops and possibly selling some shares with big gains, says John Gray of Investors Intelligence. Bullish sentiment over 60% signals even more danger.

Extremely Bullish Investor Sentiment on Stock Market Flashes Danger Signals
Extremely Bullish Investor Sentiment on Stock Market Flashes Danger Signals

Meanwhile, bearish sentiment increased slightly to 17.8% from 17.3% two weeks before. The difference between bullish and bearish sentiment expanded the bull-bear spread to +41.1% compared with the previous +40.4% (see chart). A spread above 40% calls for defensive measures. Similar spreads last July preceded the August selloff.  Another note of caution:  The number of advisors projecting a correction dropped to 23.3% from 25.0%. “Readings below 25% are worrisome,” Gray also adds.

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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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