Investor Sentiment Indicators Still Warning Stock Market Investors to be Cautious
We use investor sentiment as contrarian indicators for guidance on market direction since the average investor tends to buy and sell at the wrong times. Although the indicators show that this week’s tremendous volatility frightened some investors into being more cautious, the move away from more bullish sentiment in the previous week was not enough to signal a bottom has been reached. Instead, the indicators were warning that caution remains the watchword in this highly volatile climate – a climate which tends to confuse investors even more than usual.
For instance, the Investors Intelligence Bulls/Bears poll of stock market newsletter writers’ spread between bullish and bearish sentiment contracted to 30.2% from last week’s 40.1%. A spread above 40% calls for increased defensive measures by investors. However, a spread over 30% still means investors should be defensive. Another warning sign for investors in this poll is that although the percentage of advisors projecting a correction moved to 34.0% from the previous week’s 25.7%, that still indicates very heavily invested positions by the editors and their followers. And that means limited cash to help power markets higher.
Another note of caution comes from a weekly member survey by the National Association of Active Investment Money Managers. It shows that the advisors responding to the survey also had very little cash reserves to help power a correction, with 91.4% of their portfolios invested in stocks (see the chart below). The chart, which also includes the S&P 500, shows that stocks tend to move down around the time these advisors become heavily committed to stocks.