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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.

Investor Sentiment Indicators Continue Flashing Warning Signs
Investor Sentiment Indicators Continue Flashing Warning Signs

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.

Investor Sentiment Indicators Continue Flashing Warning Signs
Investor Sentiment Indicators Continue Flashing Warning Signs

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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