Indicator of the Week: Why This Survey Bodes Well for Bulls

The latest results in the Investors Intelligence (II) poll could be an early indicator of a short-term market rally

Senior Quantitative Analyst
Sep 9, 2015 at 6:15 AM
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The recent pullback and volatility in stocks has caused some anxiety, according to the recent Investors Intelligence (II) sentiment survey. The survey is a collection of more than 100 investment newsletters, email bulletins, etc. from investment advisors. The editors at Investors Intelligence determine the percentage that are bullish, bearish, or looking for a correction. We often take the percentage of bulls and subtract the percentage of bears to evaluate the amount of optimism in stocks.

As you can see below, the bulls-minus-bears line dropped off significantly recently. It's very close to becoming negative, which would mean more investment advisors are bearish on stocks going forward than are bullish. This week, I'll take a look at what this small difference in bulls and bears has meant historically.

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Investors Intelligence Brackets: Going back to 1970, the bulls-minus-bears line is in exactly the 30th percentile. This means the bulls-minus-bears line has been higher than the current level 70% of the time. Therefore, investors are more pessimistic right now than usual.

The table below breaks down the S&P 500 Index (SPX) returns going forward, depending on the percentile bracket of the Investors Intelligence poll. The green cells indicate average returns better than the anytime returns -- which are shown at the bottom of the table. The current level of the Investors Intelligence poll is in the proverbial sweet spot right now. As I mentioned earlier, it's at 30%, which is the middle of the only two brackets that outperform the anytime returns across all time frames. 

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Similar to the table above, this next table shows the percentage of returns going forward that were positive depending on the percentile rank of the Investors Intelligence poll. Again, the current reading puts it in exactly the 30th percentile, precisely in the middle of the two brackets that have a higher percent positive than the anytime returns across all time frames.  

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Finally, the chart below shows the SPX since 2000. The yellow marks on the chart indicate the weeks where the II bulls-minus-bears line percentile rank was between 20% and 40%. You can see it has often been an early indicator of a short-term market rally. However, using this as an indicator in 2008 would have been a disaster.

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