BULLISH SENTIMENT SURGES NEAR JANUARY HIGH
The warning flags continue to pop up all over the place and investors continue to run head first into stocks. None of the recent warning flags are as alarming as today’s huge spike in individual investor sentiment. Small investor bullishness surged to 45.3% versus last week as the market continues to melt higher. This has served as a fairly reliable contrarian indicator in the past as small investors tend to pile into stocks near the end of rallies.
Individual investor sentiment has reached levels that have historically been followed by very poor equity returns. A few of the notable periods when investor sentiment was this high include:
- A 50% reading prior to a 3 month 10% sell-off in Q2 2008
- A 45% reading prior to the 2008 market crash
- A 47% reading prior to the 20% sell-off to the March 2009 lows
- A 49% reading prior to the January 2010 sell-off
No indicator is perfect and this one has certainly been excessively bullish at points during the 2009 rally, but it confirms the growing bullish trend that we saw in yesterday’s Investors Intelligence poll where financial advisers increased bullishness to 44.9%. With institutional investors stacking up on the bullish side of the trade and now individual investors stacking up on the same side you just have to wonder – who is left to buy stocks? Better yet, who are they going to sell to?
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Doesn’t mean it can’t go much higher though.
It can still go up, but extreme readings are sending strong warnings, also: you can’t base your strategy on one indicator only.
GREAT contrarian indicator…..gives us idea that we may be close to a top (or bottom) reversal…..Hope you show us this weekly, if not on a daily basis….
Thank you…
I was a little surprised that the reading from I. I. was only 45%. Given the nonstop rally over the last few weeks I expected something higher. Most of the readings I’ve seen over the years from Investors Intelligence, occurring at market tops, tend to be in the mid 50′s and on rare occasions as high as the low 60′s. Then again it’s only one indicator.
I look for the bulls to keep it up for a few more months!