It’s painful to sit on the sidelines while markets break new highs, as they are now. It’s almost as painful as staying in the stock market as prices decline.
But some savvy investors are treading lightly these days. And the Investors Intelligence Advisors’ Sentiment readings are a big reason why.
The readings are currently showing
dangerously bullish levels not seen since the all-time high set back in 2007.
Does that mean the current bull market has reached its top? No, it doesn’t. Overbought doesn’t mean “over,” and the current bull run may still have many months left in it.
But when you see readings like this, it’s cause for pause and to prepare for at least a correction to take place. (As Eric Fry points out in today’s issue of
The Daily Grind, it never hurts to be prudent.)
Today’s Bulls Are Like My 4-Year Old
My son broke his elbow a couple of months ago after jumping on his bed when no one was looking. I always told him not to because he could fall and hurt himself. Of course, he’d say:
“
I’m not going to fall.” And most of the time, he’s right. But the stakes are too high.
And this reminds me of the stock market today.
The reason the Advisors’ Sentiment indicators are in extreme bullish territory is that so many people are saying they
aren’t going to fall.
Each week, Investors Intelligence reads more than 100 publications from newsletter writers and independent investment advisors. They report on whether they are “bullish,” “bearish” or “looking for a correction.”
When more than 55% are bullish, it’s a red flag that we are at or close to a top. (That is the level that was reported in the third week of May. Then Ben Bernanke started talking about “tapering,” which caused a correction). The closer the percentage of advisors described as bullish gets to 60, the more dangerous it is for bulls.
Just as dangerous as having too many bulls is having too few bears. Today, the poll’s percentage of bearish advisors is nearing a 26-year low! (On March 20, 1987, 13.7% of advisors were bearish. The S&P 500 advanced another 10% and then lost 20.5% in a single day).
Again, I’m not saying that’s about to happen, but take note.
What History Shows
Today, the reading shows
59.6% of advisors polled are bullish.
To put it into context:
- During the October 2007 bull market top, 62% of advisors were bullish. Over the following 18 months, the S&P 500 declined 57.7%. We are currently witnessing the largest percentage of bulls since October 2007.
- One week prior to the May 2011 bull market top, 57.3% of advisors were bullish. Over the following five months, the S&P 500 declined 21.63%.
Let’s look at this differently. Viewing the spread between the percentage of bulls vs. the percentage of bears is very useful too. A spread above 35 is considered a red flag, and when it hits 40 it’s considered extreme territory.
In April 2011 we had a 41.6% spread. In October 2007 we had a 42.4% spread.
The spread today is 45.5%.
This sentiment indicator is a contrary indicator and one of the few
leading indicators. And it’s showing more bullishness than in April 2011, at the last bull market high.
Now, markets can stay overbought for a long time. And I’m not rooting for a bear market or a bull market. I just want you to keep your profits.
This is not an emergency. But be picky about what you hold. Consider getting a bit more conservative here. Remember to follow your stops. The Oxford Club recommends a 25% stop loss on most of its recommendations.
It’s extremely difficult and frustrating to focus on the week to week and month to month moves. But the most reliable signals and indicators tend to be the more intermediate-term to long-term indicators, and the one we’ve studied today has a strong long-term track record.