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Growing Bullish Sentiment is Indicating Stock Market is Getting Very Dangerous

Growing Bullish Sentiment is Indicating Stock Market is Getting Very Dangerous.  We use investor sentiment as historically accurate contrarian indicators of the direction of the stock market. So we’re not surprised the ongoing record-breaking rallies are making investors absolutely giddy.  As a result, blinding them to the evidence that the market is increasingly overbought. In other words, all that illogical optimism is pushing bullish sentiment to danger levels, from a contrarian viewpoint. For instance, The Investor Intelligence poll of more than 100 writers and editors of stock market newsletters reports bullish sentiment climbed  this week to from 57% to 59.4%. That’s the highest level since September 2018 when the bulls hit 60%. And that was followed by a major downturn that made 2018 the worst year in a decade for U.S. stocks.

Growing Bullish Sentiment is Indicating Stock Market is Getting Very Dangerous
Growing Bullish Sentiment is Indicating Stock Market is Getting Very Dangerous

Meanwhile bearish sentiment was virtually unchanged at 17.9%. Bearish sentiment under 20%  historically is not attractive for buying. With the increase in bullish sentiment, the spread between bullish and bearish sentiment expanded this week from +39.2% to +41.5% (see chart). Spreads over +40% mean investors should begin taking defensive measures.  Investors during big rallies lose sight of the fact that excessive investor exuberance.

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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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