Since 1963 our Advisors Sentiment leading indicator has been predicting market tops and bottoms and a market correction is potentially imminent.
Currently the market is at dangerous levels as professional advisor sentiment is at all time highs. For over 40 years we have measured professional sentiment as we believe this has a far greater relevance to the market than the twittesphere. You can see from the below chart that last time our indicator showed higher levels the market corrected shortly afterwards.
Everyday we base our trading ideas and model portfolio positions on market sentiment the proprietary signals generated by our point and figure charting algorithm.
The basic premise of our analysis is that the more optimistic the market becomes the higher the likelihood of a correction.
Bulls return to danger levels!
Markets started the long July 4 weekend with the main indexes all at highs. Indicators also strengthened over the week, with most oscillators overbought and at their prior top levels. A few newsletter editors noted the strong action and shifted back to bullish, including some changes after yesterday’s modest decline. The result was a resumption of the overly optimistic expectations recently shown. Again they signal potential danger ahead for the market.
The bulls rebound to 60.6%, after falling for three weeks to 57.6%. Their number is back in danger territory above 60%, where they were for four consecutive weeks. A multiyear high occurred early June at 62.6%. Excessive bullishness is a sign professionals are near fully invested and most often occur near to a bull market top. Before last month other occasions with more than 60% bulls included the final week of 2013 and first week of this year. Stocks held strong for a few weeks but bulls contracted down to 41.8% with the market lows early February. Prior high levels were shown in August 1987 (60.8%), October 2007 (62.0%) and December 2004 (62.9%), after large rallies and ahead of sizeable corrections.
The bears fell to 15.2%, from 16.1% a week ago. That equals their January low, after a steady overall contraction since mid-April’s reading of 21.7%. The bears were a bit lower late 2013. The recent index highs, even after Fed tapering began, makes the case for a major selloff difficult to support. Some bears state that action is long overdue after more than five years of market gains. Most bears have maintained their negative outlook throughout 2014.
There was also a decline for those projecting a correction to 24.2%, from 26.3% last issue. Nervousness often increases as markets rally to allow for still more gains. Now after weeks of higher readings their number has now diminished. That is not a good sign. Additionally many with this outlook expect a new buying chance after a modest retreat. How they act if markets do retreat near 10% could signal the direction after that.
The spread between the bulls and bears expanded to 45.4%, from 41.5% and, and just above the reading before that. It was the seven straight difference above 40% but none has yet equaled the 46.4% spread that ended 2013. By early February it was down to 24.4%. The last favorable spread occurred in August 2013 at 13.4%, close to the 10% (or less) reading that allows for broad buying. Bears haven’t outnumbered bulls (negative spread) since October 2011.
Signals when you need them – near important market tops and bottoms
This survey has been widely adopted by the investment community as a contrarian indicator and is followed closely by the financial media. Since its inception in 1963, our indicator has a consistent record for predicting the major market turning points.
Forbes calls it: “The Most Reliable Indicator Of An Approaching Market Top”
Surveying a broad assembly of respected views
We study over a hundred independent market newsletters and assess each author’s current stance on the market: bullish, bearish or correction. Since we have had just four editors since inception, there has been a consistent approach to determining each advisors stance and his prior viewpoint.
“In 23 years in this business, I have found your service (after acquiring the skill to read it) the single best indicator in the world.” A.G. (Subscriber)
Four decades of data to set our precedent
Our weekly sentiment data runs consistently back to the 1960’s. Current readings are put into context against historic precedents. When the survey was developed by our founder, AW Cohen, he originally expected that the best time to be long the market was when most advisors were bullish. This proved to be far from the case – a majority of advisors and commentators were almost always wrong at market turning points. Quite simply, professional advisors are just as susceptible to market emotions as individual investors – they become far too greedy at the top of trends and far too fearful near the bottom.
A contrary indicator…but only at extremes
We don’t necessarily take a contrarian view to the newsletter writers in our survey. A large part of the time our sentiment readings remain neutral. We consider the norm to be 45% bulls, 35% bears and 20% neutral. However, we do pay attention to extreme readings in both bulls and bears and also to historically significant runs of more bulls than bears. To summarize, advisors are only wrong when you get too many of them start thinking the same thing.
|Example, back in October 2002, there were many more bearish than bullish advisors – historically this has always been a good time to start thinking about buying the market.|
|Here’s what Alan Abelson, writing in Barrons in early 2011 has to say about it:“…………….while it helps, we suppose, to be able to tell the difference between a balance sheet and an income statement and know what P/E stands for, nothing in the investment armamentarium beats an educated grasp of crowd psychology. Granted, getting a handle on investor sentiment is not an automatic guarantee of making a killing on the Street. It’s a contrarian indicator that has been around for a spell, and like a lot of venerable technical tools is a bit the worse for the wear. It’s grounded in the logical assumption that when everyone’s bullish, it implies that a lot of buying power has already been used up and, of course, when everyone’s bearish, the opposite holds. If not infallible (what is, as we’ve noted before, besides the pope and financial journalists?), it provides investors with a highly reliable litmus test when the market reaches extremes of optimism or pessimism. And, right now, bullishness is dangerously rampant.For confirmation, just take a gander at that simple chart that enlivens this grim page, the handiwork of Investors Intelligence, which weekly tracks the view of those earnest souls, investment advisors, who tell you when, and often what, to buy and sell. It depicts the difference between the number of advisors who are upbeat and who are downbeat. That awesome spread in favor of the bulls works out to 41.6%, the most lopsided since the October 2007 all-time market peak, when the comparable gap was 42.4% and set the stage for the beginnings and forgive us for stirring painful memories of the worst equity disasters of the past half century.”|
Historic Advisors Sentiment Data – available for a separate fee of $1495
Advisors Sentiment subscribers can view the charts of this indicator going back ten years. Our analysts also highlight re-occurance of various historic levels as and when they occur. For hedge funds, “black-box” traders and quants we also offer the entire historical data set, from its start in 1963, for back-testing and modeling for proprietary systems.
The data available for a separate fee from the website subscription. It is available for purchase for US$1495. The data is emailed in Excel format upon payment by Visa/Mastercard/AMEX credit card, or receipt of a check or money order. Credit card payments greatly speeds the transaction, and be sure they are payable in US funds.
Please note: The Advisors Sentiment Report is also available as part of our US Market Timing Service.