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Stock Market Sentiment Indicators Say It’s Still Not Time to Buy

We use investor sentiment as contrarian indicators of when the stock market is oversold and overbought because investors are historically wrong about when to buy and when to sell. The recent stock market correction has moved the indicators down from very bullish sentiment levels at market peak, but not enough into bearish territory to indicate the market has become oversold. In other words, wait before you buy.

The Investors Intelligence Bulls/bears poll of sentiment among stock market newsletter writers is a good example of what the sentiment indicators are telling us (see chart below).   Writers expressing bullish sentiment have gone down from 57% to 49%. But historically from a contrarian viewpoint that’s not nearly enough of a drop to indicate stocks have become oversold. An even greater note of caution is the fact that bearish sentiment among these writers has not budged, remaining below 18%. Typically at market bottoms, such as in 2016 and 2018, bearish sentiment among these writers has climbed considerably higher at the same time bullish sentiment has dropped much lower. In other words, as the chart indicates, it is going to take a big move upward in bearish sentiment and a greater decline in bullish sentiment to establish a firm market bottom that signals it is a good time to buy stocks.

Stock Market Sentiment Indicators Say It’s Still Not Time to Buy
Stock Market Sentiment Indicators Say It’s Still Not Time to Buy

Chart provided by investors-intelligence.com.


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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