5 Signs We Haven't Hit a Market Top

We're not yet in the "euphoria" phase of the sentiment cycle, which is a good thing for stocks

by Andrea Kramer |

Published on Jun 19, 2017 at 3:14 PM

U.S. stocks are on a tear today, with the Dow and S&P notching record highs, while the Nasdaq paces for its best session in months. However, prior to today, it was a bit of a bumpy ride, particularly for tech stocks, and the recent testimony of former FBI Director James Comey also rattled a few cages. Below, we've outlined five signs that pessimism is prevalent in spite of the long-term rally, and why that could mean even more upside for the stock market.

1) Investors Think U.S. Stocks Overvalued

The latest BofA-Merrill Lynch survey (subscription required) indicates that a record number of fund managers think stocks and corporate bonds are overvalued. Forty-four percent of investors consider equities overpriced right now, compared to 37% a month ago. Further, 84% believe U.S. stocks are the most overvalued, with 75% deeming internet stocks "bubble-like," and only emerging market stocks deemed fairly valued. 

2) Correction Seekers Hits 3-Month High

The latest poll from Investors Intelligence (II) showed optimism fell last week, but the percentage of bulls still remains at 50%. Meanwhile, the number of advisors predicting a correction jumped from 25.9% to 31.4% last week -- the highest since late March's post-election peak. The percentage of II bears ticked higher to 18.6%, marking the fourth straight week above 18% -- the longest since early January.

3) AAII Bulls Move to Neutral Camp

The most recent American Association of Investors Intelligence (AAII) survey shows a 3.2 percentage point drop in the number of self-identified bulls, with all of them flocking to the neutral camp, which rose by the same amount. The number of bullish AAII respondents now stands at 32.3%, and has undergone the biggest four-week drop since late November. Plus, it's now the 22nd straight week with bullish readings below 40%, and 128 weeks -- the longest on record -- below 50%, according to data from Schaeffer's Quantitative Analyst Chris Prybal.

For the record, the majority of AAII respondents fall into the neutral camp, at 38.2%. Meanwhile, 29.5% of those surveyed identify as bearish, even with last week.

4) Consumer Sentiment Freefalls Post-Comey

The University of Michigan's gauge of consumer sentiment dropped to 94.5 in early June, it was reported last week, marking the lowest point since the November election. Further, the researchers said that the drop "masks a much larger decline since June 8th" -- the day of the Comey testimony -- subsequent to which the gauge has fallen to 86.7. In May, the consumer sentiment index registered at 97.1.

5) Speculators Seek Safety in Gold

Among large speculators, the number of net long positions on gold hit a post-election high earlier this month, according to the latest Commitment of Traders (CoT) data. While that number declined slightly in the week ended June 13, it's still well above the multi-month lows seen in early May. In fact, these positions -- which many would interpret as a safety net, as traders dump stocks for tangible assets -- are up nearly 64% from the week ended May 16.

What Does It Mean for Stocks?

Clearly we're not yet in the "euphoria" phase of the sentiment cycle that tends to mark market tops. As Schaeffer's Senior VP of Research Todd Salamone noted in today's Monday Morning Outlook, "the sentiment backdrop favors equities from an intermediate-term to longer-term perspective," as the latest data "is indicative of ample cash to fuel the stock market higher, even if it experiences a short-term hiccup or two."
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