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Higher and Higher Levels of Bullish Stock Market Sentiment are Getting Downright Scary

Higher and Higher Levels of Bullish Stock Market Sentiment are Getting Downright Scary. We use investor sentiment gauges as historically accurate contrarian indicators  of  the direction of the stock market. So, what’s raising red flags for us is this week’s poll of more than 100 newsletter writers from SentimenTrader. FYI, SentimenTrader supplies the research to determine  market exposure for the Active Alts SentimenTrader Long/Short portfolio  that we manage. SentimenTrader’s poll shows the bulls edged higher to 61.5%, from 60.0% last week  as a few more editors increased their exposure to stocks. That is a new high for 2020 and the most bulls since September 2018, which was at 61.8%. Bullish sentiment above 55% bulls calls for defensive measures – tight stops at the minimum and possibly some selling among shares with big gains. Bulls at 60% and above signal increased danger the higher they get, and the need to prepare for a market decline The bears barely changed at 16.4%, up fractionally from their 2½ year low at 16.2% a week ago. “Most of the bears have missed the five month rally. Now they remain on the sidelines, suggesting a major decline is near, “ says SentimenTrader.

SentimenTrader points out that the current bullish levels are up substantially from just 30.1%, shown near the market lows of March 23. That was the fewest since Dec-2018 ended with a similar 29.9% count. Bulls near 30% say cash is high after a market tumble for a lower risk buying chance. Those signals for market bottoms occur much more quickly than indications for market tops. As you can see from the chart below, the bull-bear difference moved further into the danger zone at +45.1%, from +43.8% last issue. We should mention sentiment top signals can take months before markets decline. However, they also keep intelligent traders from waiting too long and watching gains turn to big losses. So, the bottom line for us is that we’ve moving into cash because we have a long/term, short/long strategy to minimize risk and maximize profitability. 

Higher and Higher Levels of Bullish Stock Market Sentiment are Getting Downright Scary
Higher and Higher Levels of Bullish Stock Market Sentiment are Getting Downright Scary

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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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