Sentiment is not a timing indicator, but it is an indicator of problems. And bullish sentiment is greater today than at any time in the past 27 years according to Asbury Research.
Please consider When Being Bullish Can Become Problematic.
Investor sentiment is an important component of financial market analysis because it tells us what investors are collectively thinking. More specifically, when a certain type of investor gets either too bullish or too bearish on an asset, it usually means something important — that investors have become “off-sides” — and typically precedes a important trend reversal in the price of that asset.
One of the dozen or so data series that we track, the Investors Intelligence data, was particularly interesting this past week because the Bulls minus Bears subset of this series (blue line, lower panel of chart below) rose to an historic most bullish extreme that hasn’t been seen since February 1987.
More simply stated, the stock market newsletter writers that have comprised this series since 1963 have not been this bullish in almost 27 years.
The red highlights on the show that, at 46, this series as at an historic high extreme, and that similar or lesser extremes have coincided with or led some of the most important peaks in the S&P; 500 (black bars, upper panel) in recent history including October 2007, April 2010, and 2011.
Sentiment can always get more extreme, and indeed that is how it reached higher levels than the stock market peaks in 2000 and 2007. Thus my caution “sentiment is not a timing indicator.”
Nonetheless, history suggests those plowing into the market today are going to regret it.
Mike “Mish” Shedlock