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Investor Sentiment Warning Stock Market is Entering Danger Zone

We use investor sentiment as historically reliable contrarian indicators of the stock market’s direction. The Investors Intelligence Bulls/Bears poll of newsletter writers moved slightly higher this week in the danger zone with 55.3% of the writers bullish, up from 55.1% a week ago, and 43.9% in late August. Bullish sentiment above 50% is worrisome, and bullish sentiment over 55% suggests investors start taking defensive measures, including selling shares with large gains. It is important to note that bullish sentiment was over 55% for the four weeks preceding last summer’s August selloff. Bearish sentiment at 17.1% this week also was a warning sign, matching the mid-July low bearish readings preceding the August selloff.

The spread between bullish and bearish sentiment was up slightly to +38.2% from 38.3% the previous week (see chart).  Both sentiment readings are deep within the caution zone, nearing the levels of over +40% in late July just prior to the August selloff. Our conclusion? Be very careful!

Investor Sentiment Warning Stock Market is Entering Danger Zone
Investor Sentiment Warning Stock Market is Entering Danger Zone


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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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