Why The Extreme Reading On This Indicator Hints at a Short-Term Breather

The latest Investors Intelligence (II) poll could suggest stocks are in for a short-term breather

Jan 12, 2017 at 8:26 AM
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Optimism edged higher in the week ended Jan. 6, according to the latest Investors Intelligence (II) poll -- which measures the percentage of investors that are bullish, bearish, or predicting a correction. Specifically, as multiple stock indexes carved out new highs, bullish sentiment among advisers rose 0.4% to 60.2%. Conversely, the percentage of bears among advisors fell 1.2% to 18.4%. Of investors polled, 21.4% are expecting a correction -- up from 20.6% in the week prior.

According to Schaeffer's Senior Quantitative Analyst Rocky White, the bulls are near their highest level since July 2014, while the bears are hovering around their lowest point since August 2015. What's more, the bulls-minus-bears line is at 40.3% -- its fourth straight week above 40%, which we consider an extreme indicator of optimism, and well above the average reading of 21%.

II bulls_bears
II bulls_minus_bears

Such extreme optimism could spell trouble for stocks in the near term. For starters, the Dow Jones Industrial Average (DJIA) -- which is trading near the psychologically significant round 20,000 mark -- has averaged a loss in near-term time frames after crossing an even 1,000-point interval while the percentage of bulls in the II poll was over 50%. Meanwhile, the current bulls-minus-bears line is ranked in the 93rd percentile of all other comparable readings going back to 1972, and historical data points to an S&P 500 Index (SPX) underperformance looking at all time frames in the subsequent two-month period.

spx returns based on bulls_minus_bears line

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