Investor Sentiment Indicators Continue Flashing Warning Signs
We use investor sentiment as contrarian indicators on stock market direction, and they continue to indicate investors should remain defensive. For instance, bullish sentiment among the more than 100 newsletter writers in the Investors Intelligence Bulls/Bears poll was 54.2%, That’s better than the three prior weeks when sentiment was above 55%, which translates into elevated risk. However, at 54.2% investors we believe investors should remain cautious. In other words, we are far from out of the woods in terms of where the market is headed.
Another warning sign is that bearish sentiment remained at 16.8%. For contrarians few bears mean higher risk. That’s because most of those in the poll are fully or nearly fully committed to stocks, limiting funds for further buying. Meanwhile, the spread between the bulls and bears narrowed to 37.4% from 41.2% last time (see chart.) In our estimation that still calls for caution.
Yet another note of caution comes from the Smart Money/Dumb Money Confidence spread, derived from historically good and bad investors. While slightly improved from last week’s -0.51 (see chart), it continues to indicate investors should remain very cautious.