Stock Market Sentiment Indicators Suggest Investors Should be Cautious
We use investor sentiment as contrarian indicators on stock market direction. The latest sentiment indicators were moving toward overbought territory suggesting investors should be cautious. For instance, the Investors Intelligence Bulls/Bears poll of stock market newsletter writers reported bullish sentiment was becoming more optimistic, moving up to 50.5% from 48.1% last week and 42.7% before that. Bullish sentiment over 55% signals high risk and defensive action. Bearish sentiment was barely changed at 18.4% from 18.3% the week before. For contrarians, the paucity of bearish sentiment means higher risk.
Two other elements of the market signaling caution are the lack of breadth amid recent upward moves and that financials are doing so poorly. The fact that this major sector is not participating in the rally makes the rally itself suspect in terms of a true bull market.
Another note of caution comes from the Smart Money/Dumb Money Confidence Indicator which also is showing the market is moving toward the overbought direction it was in in the spring when it was indicating investors should sell.