Some Investor Sentiment Gauges Reach Panic Levels

For the fourth time since October 2014, the S&P 500 is testing the mid-1,800s.

That’s right about where investors threw in the towel before, and with regret watched the S&P move higher.

Will it be the same this time around?

The chart below plots the S&P 500 against the CBOE Equity put/call ratio, the percentage of bullish advisors and newsletter-writing colleagues polled by Investors Intelligence (II), and the percentage of bullish retail investors (polled by the American Association for Individual Investors – AAII).

As a composite, those three groups are about as bearish as they were near prior S&P lows. In fact, the CBOE Equity put/call ratio soared to a multi-year high on Friday, and the percentage of bullish investors is at a 10-year low.

Investor sentiment suggests that stocks are ripe for a rally, but this would be the fourth time the S&P is following the same script (bounce in the 1,800s). Is it time for a curveball?

The January 19 Profit Radar Report warned that a break below support at 1,870 would result in a quick drop to 1,820 and provided a long-term perspective on the S&P 500 (has a major market top been struck or not?) along with a short-term forecast.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Detailed Investor Sentiment Comparison Between 2007 and 2015

Once a month, the Profit Radar Report publishes a detailed analysis of investor sentiment (called Sentiment Picture).

The October 2015 Sentiment Picture tackled the question whether current investor sentiment is indicative of a major market top.

To find out, the Sentiment Picture provided a side-by-side comparison of investor sentiment at and leading up to the 2007 top with current sentiment.

Before we get to the 2007/2015 comparison, allow me to fine tune expectations. There are things sentiment analysis can and cannot do.

Sentiment analysis (like any single indicator) is not infallible and shouldn’t be used as stand alone indicator. The Profit Radar Report always looks at the combined message of supply/demand, technical analysis, seasonality and sentiment.

Sentiment, however can help gauge the probability of a major top or bottom. To illustrate, the July 24 Sentiment Picture attempted to answer the same question: Are there enough bulls to form a major market top?

It stated that: “Considering that stocks just were near all-time highs, sentiment is quite subdued. The lack of real investor enthusiasm, has continually pointed to new highs, and does so again this month. The question is when a bigger correction will occur.”

The ‘bigger correction’ started shortly thereafter, but stocks are trading near their 2015 highs once again.

The September 24 Sentiment Picture noted extreme bearishness and proposed that: “Sentiment is pointing towards a buying opportunity. In fact, purely based on overall sentiment, stocks should be closing in on a tradable low.”

That tradable low occurred three days later at S&P 1,871.

Are There Enough Bulls for a Major Market Top?

Below is the sentiment chart featured in the October 29, 2015 Sentiment Picture. This chart plots the S&P 500 against six different sentiment gauges (the actual sentiment analysis includes dozens more indicators):

  • CBOE SKEW Index
  • CBOE Equity Put/Call Ratio
  • CBOE VIX
  • National Association of Active Money Managers (NAAIM) equity exposure
  • Percentage of bullish advisors polled by Investors Intelligence (II)
  • Percentage of bullish retail investors polled by the American Association for Individual Investors (AAII)

The second chart highlights investor sentiment surrounding the 2007 high.

  • In 2007, the VIX was trading near 16. This was 50% lower than the August high (near 30), but 60% above the 2007 low (near 10).
  • The CBOE Equity Put/Call Ratio (5-day SMA) was towards the lower end of its range.
  • The SKEW wasn’t extremely high, but towards the upper end of its range.
  • Investment advisors and newsletter writers (polled by Investors Intelligence – II) were extremely bullish.
  • Retail investors (polled by the American Association for Individual Investors – AAII) were extremely bullish.
  • Active investment managers (polled by the National Association of Active Investment Managers – NAAIM) were bullish.

In October 2015, investors are not as bullish as they were in 2007. This becomes particularly obvious when looking at the AAII, II and NAAIM crowd.

Since the October sentiment picture was published, investors have become a bit more bullish. Perhaps even bullish enough for another pullback (there was also some significant internal weakness last week), but investor enthusiasm as not as pronounced as it was in 2007 or other historic market tops.

Investor sentiment is just one of the four powerful price movers monitored by the Profit Radar Report. Here is a (free) detailed look at supply and demand (or liquidity): Is the Stock Market Running out of Willing Buyers?

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Investment ‘Pros’ are Bullishly Bearish

Investment advisors and newsletter-writing colleagues are as bearish right now as they were in March 2009, when the S&P briefly struck 666.

Yes, a quick 12% drop in 2015 caused the same fear as the biggest financial crisis since the Great Depression.

Ok, perhaps (even probably) that’s an exaggeration, but the investment pros (polled by Investors Intelligence) show the same fear now as they did at the end of the financial crisis. No matter how you slice it, that’s pretty remarkable.

The chart below, which plots the S&P 500 against the percentage of bullish investment advisors, offers a glimpse into advisors’ collective mind. 3 out of 4 advisors recommend staying away from stocks.

The dashed green lines mark similar investor sentiment extremes, which were not long-term bearish for stocks.

The only potential exception was a somewhat similar reading in July 2008 (dashed red line). But even this one sparked a notable rally before the bottom fell out.

Does this mean stocks can’t go any lower? By no means. But a drop below or test of the August 2015 panic lows may be a trap for bears.

That’s at least what this S&P 500 template (which also predicted the sharp August selloff) implies.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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2011 vs 2015 – Sentiment Comparison

Over the past two weeks we explored two developments:

  1. Stocks had to rally to flush out premature bears
  2. 2015 is looking a lot like 2011

A couple of sentiment indicators (such as AAII poll) showed extreme pessimism recently.

2011 saw an 18% drop starting in July.

The question for right now is this: Is there too much pessimism for a summer correction?

The first chart shows sentiment in 2011. The gray bar highlights June 2011.

By mid-June, investors polled by the American Association for Individual Investors (AAII) and Investors Intelligence (II) had become quite pessimistic. Only 24% and 37% of investors were bullish.

A 7.8% S&P 500 (NYSEArca: SPY) rally from June 16 – July 7 relieved much of that pessimism, but it didn’t take a spike into extreme optimism for stocks to plunge in July.

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A look at current sentiment shows a similar scenario.

Optimism was quite low (extremely low for the AAII survey), but recovered, no doubt due to the 58-point rally from the June 15 low.

Based on the 2011 analogy, stocks may rally into early July. An updated look at the 2011 vs 2015 analogy is available here: 2015 is Looking a Lot Like 2011

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Can We Still Trust the Investors Intelligence Sentiment Poll?

Doing the same thing over and over again, but expecting a different outcome is often considered insanity.

By that definition, some analysts are legitimately insane. Why?

Because they’ve doomed the stock market based on bullish investor sentiment, and have been doing so for many months, even years.

You will see what I mean upon further inspection of the chart below.

Since late 2013, the Investors Intelligence (II) survey of advisors and newsletter writers has shown (extreme) bullish sentiment.

Illustrated via the chart is the percentage of bearish advisors. This percentage has been around 14 since late 2013, which happens to be the lowest since 1987.

And since late 2013 (and way before that), Elliott Wave International (one of many market forecasting services that’s been spreading doom and gloom) has been warning that a 2008-like meltdown is directly ahead.

The cold fact is that the S&P 500 has tagged on another 20%+ since 2013.

This is not the data’s fault. It’s the interpreter’s fault … and an unfortunate symptom of tunnel vision. Perhaps the II poll has just become too popular to be effective as contrarian indicator, and lost its mojo.

II is not the only sentiment data available, and it’s the analyst’s responsibility to determine the validity of the II survey in context with other sentiment data. Now more than ever, it’s important to widen the horizon and look at other sentiment gauges.

The Profit Radar Report monitors dozens of sentiment indicators and consistently publishes at least six every month.

For example, the February 19 Profit Radar Report Sentiment Picture summed things up as follows: “In short, sentiment is elevated, and may be a short-term drag, but is not indicative of a major market top.”

Throughout 2013 and 2014, the Profit Radar Report pointed out the lack of excessive optimism and likelihood of higher stock price (click here for a more complete record or the 2014 sentiment analysis).

Here is a look at the latest Sentiment Picture, published on May 29.

The two charts categorize various sentiment gauges as either opinion poll (what investors say) or money flow (what investors do).

The American Association for Individual Investors (AAII) and National Association of Active Investment Managers (NAAIM) opinion surveys do not confirm the bullish (bearish for stocks) tone of the Investors Intelligence poll.

Three other sentiment gauges more closely related to actual money flow do not show any real extremes.

What’s the moral of the story?

Don’t trust fear mongers or ‘one trick pony’ predictions based on any single sentiment gauge.

We live in a complex world. We need complex analysis.

Oh, on by the way, purely based on sentiment, stocks could continue to grind higher.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Investor Sentiment Polls Show Serious Conflict

Anyone wanting to ‘massage’ data is in heaven right now.

Bulls can point out that retail investors, polled by the American Association for Individual Investors (AAII), are very bearish (bullish for stocks).

Bears can point out that investment advisors and newsletter writers, polled by Investors Intelligence (II), are very bullish (bearish for stocks).

There’s a stat for everyone.

In fact, the spread between the AAII and II group is at the top end of its range, and the highest it’s been since July 2014.

Perhaps that’s the graph we should focus on. The chart below does just that:

The red lines indicate that extreme viewpoint differences, like we’re seeing right now, led to some short-term S&P 500 (NYSEArca: SPY) weakness in the past.

A long-term analysis of the opinion spread is available here: Retail Money is Much More Bearish Than Investment Pros

What’s the lesson? Don’t trust anyone who says stocks must go up or down, because investor sentiment is bullish/bearish this or that.

 

The fact is, that some of the individual sentiment extremes offset each other.

My March Sentiment Picture (part of the Profit Radar Report), which graphs six different sentiment gauges, concluded that: “There are no real extremes, and sentiment doesn’t foreshadow any large and sustainable moves in the immediate future.”

The ‘immediate future’ has come and gone, but the trading range remains.

A comprehensive analysis shows that overall sentiment is currently slightly more bullish than bearish. If I had to illustrate sentiment on a scale from 1 – 10 (10 being most bullish), we’d be at a 6 or 6.5.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Market Pulse: Is Investor Sentiment Really ‘Dangerously Bullish’?

How bullish are investors really? There are different types of investors, individual investors, institutional investors, traders, smart money, dumb money … and there’s a gauge for each group. Here’s a look at six different investor sentiment indicators.

The market has been stuck in yet another waiting pattern, so we might as well use the time to look at the forces that may (or may not) jolt stocks out of their waiting loop.

According to many, overheated investor sentiment will break the stale mate and send stocks spiraling lower.

There’s just one flaw with this line of reasoning. Sentiment is not overheated.

The Profit Radar Report continuously analyzes how investors feel about stocks and publishes a comprehensive sentiment picture once a month.

The chart below, which plots the following six sentiment gauges against the S&P 500 (NYSEArca: SPY), was published in the August Sentiment Picture on August 29:

  • CBOE SKEW
  • Equity put/call ratio
  • CBOE Volatility Index (VIX)
  • NAAIM survey of active money managers
  • II survey of investment advisors
  • AAII survey of individual investors

Where are the sentiment extremes?

There’s only one: Last week 51.92% of individual investors were bullish. That’s the highest reading since December 24, 2013. The red lines highlight other 50%+ spikes and how the S&P 500 reacted.

Yes, the bullish December AAII reading was followed by a January pullback, but there’s a big difference between today and December: No other indicator is confirming August’s AAII spout of enthusiasm, and AAII bulls are back down to 44.70%.

There was one more extreme not illustrated by the chart: The percentage of bearish investment advisors polled by II dropped to 13.3%, the lowest reading since 1987. This is a legitimate extreme.

The August 29 Sentiment Picture summed up the big picture sentiment situation as follows:

Perhaps most noteworthy is that we continue to see isolated sentiment extremes, but the source of such extremes only rotates (the SKEW and put/call ratio in July, the AAII poll in August), it doesn’t compound. We see different gauges hit overheated levels at different times, but never all at the same time.

The overall sentiment picture is fractured, and void of the ‘all in’ mentality seen near major market tops.

Isolated extremes cause only small pullbacks here or there.

Based on sentiment, we could see 1) a continued grind higher interrupted by the occasional 3-10% correction or 2) a prolonged period of choppy sideways trading.”

Bottom line, sentiment is not extreme enough for a big scale market top.

The most important market breadth indicator, which correctly foreshadowed the 1987, 2000 and 2007 crashes, also doesn’t show the deterioration needed for another crash.

More details about this must-know indicator can be found here: How to Discern a Major Market Top

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.