Investors benefit from equity gap

Long-term optimism can have disastrous effects on markets

Given the uncertainty of stock market trading, we as investors are always looking for the latest and most accurate technical data analysis in order to maximize profit from the smallest possible risk. This week I wanted to take a look at a popular sentiment indicator that could explain the current propensity for investors to be optimistic while also looking cautiously into the future. Specifically, Investors Intelligence, the oldest tech research company, publishes data on the percentage of bulls and bears currently trading, and signals as much optimism that is currently being put into the market. Using data and insights from Schaeffer’s Senior Quantitative Analyst Rocky White, we were able to compare bull, bear, and correction data from 2005 with the latest data from Investors Intelligence.

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Compared to each of their long-term averages, the bulls are currently higher than the 48% average at 57.4%, while the bears are lower at 18.8% and 24% average. The bull minus bears line is still above the average of 25% with a value of 38.6%. To put this in perspective, we usually view a value above 40% as a sign of extreme optimism. It is also worth noting that the survey shows a score of over 50% in bulls for 44 consecutive weeks. This, of course, suggests a lot of optimism and reflects the broader market growth we’ve seen over the past 12 months.

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That being said, White then looked back to the past when the poll found over 50% bulls for 44 weeks. It only happened one more time, in early 2004, and the market performed poorly in the future, falling more than 3% over the next six months. However, the market rebounded after this retreat and eventually grew 5.8% over the next year. At this point, the poll was above 50% of the bulls for 46 weeks before falling below 50% again.

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For the S&P 500 Index (SPX) In particular, the bull bears’ percentile rank from the Investors Intelligence survey rose to 38.6% last week and was in the 89th percentile of all metrics since 1972. At that high of a percentile, the index sees 355 returns, but all in the redone one, two, four and eight weeks. In simpler terms, pent-up optimism tends to expand and contrary traders should take actionable steps to hedge if they remain optimistic about long-term marketability. In terms of the current investment climate, if all these bulls suddenly turn bearish, the latest reading could be an indication that we are vulnerable to a major pullback.

Bernie Schaeffer’s subscribers Chart of the week received this comment on Sunday March 28th.

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