Raging Bulls Could Send Stocks Reeling

The S&P tends to struggle after one of these sentiment signals

Feb 1, 2018 at 3:05 PM
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We recently examined a bullish extreme in the weekly Investors Intelligence (II) sentiment survey, as the "bulls minus bears" percentage ramped above 50% for the first time since 1987 (a calendar year that's likely to bring up some unpleasant associations for most investors). This week, as the II bulls-bears line remains unusually high, here's a sobering angle on this rampant investor optimism.

Bullish investment advisors accounted for 66.0% of respondents in the latest weekly II survey, while bears dropped to 12.6% -- yielding a bulls-minus-bears figure of 53.4%, in the 99th percentile of all-time readings. Looking back at the 53 previous occasions where the II bulls-bears difference arrived in the 99th percentile, S&P 500 Index (SPX) returns going forward have been fairly abysmal.

Per the below data from Schaeffer's Senior Quantitative Analyst Rocky White, the SPX underperforms across the board after one of these II sentiment signals (there have been 53 occurrences since 1963). Looking out over the following one-month, three-month, six-month, and 12-month periods after a 99th percentile reading, the SPX significantly lags its comparable "anytime" performance.

Note that average returns, median returns, average positive returns, and the percentage of positive returns are all considerably worse after one of these signals, which would seem to suggest a tough road ahead for the stock market.

That said, at least it could be a fairly gentle road lower. After one of these II bullish extremes, the SPX's average negative returns are smaller than usual over every time frame, and the standard deviation of returns (a.k.a. volatility) is also significantly lower than its "anytime" counterpart.

spx sell-offs after ii bulls-bears extremes


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