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!
Chart provided by www.investors-intelligence.com.