Wall Street Bulls Are Going AWOL: What It Means for Stocks

II bulls haven't been this low since Trump was elected

Apr 12, 2018 at 1:31 PM
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Concerns about a trade war with China, the Facebook (FB) data scandal, a presidential tirade against Amazon (AMZN), and geopolitical tensions in the Middle East likely contributed to another drop in bullish sentiment last week. Specifically, the latest Investors Intelligence (II) survey showed the number of self-identified bulls fell to its lowest point since October 2016, sending up a second rare sentiment signal of 2018. However, if history is any indicator, these sidelined traders could jump back into stocks over the next few months.

Former Bulls Now Expecting a Correction?

The number of II bulls dropped 5.4 percentage points to 42.2% last week, marking another three-week drop in optimism. Meanwhile self-identified bears edged up 0.5 percentage point to 18.6% -- the highest since mid-September -- and advisors expecting a correction crept 3.2 percentage points higher to 36.9%, marking the highest since May 2016.

The bulls-minus-bears line is now at 23.6%, marking its lowest point since November 2016, according to Schaeffer's Senior Quantitative Analyst Rocky White. The line decreased for a fourth consecutive week -- something we saw in February, amid the stock market correction. Prior to that, the II bulls-minus-bears line hadn't dropped four straight weeks since September 2016. The only other year in which this signal sounded twice was 2013, looking at data since 2010.

spx and ii bulls-bears line since 2013

spx after ii bulls-bears line falls 4 weeks

Short-Term Pains, Long-Term Gains for SPX?

These sentiment signals have preceded short-term weakness for the S&P 500 Index (SPX). Looking at previous four-week drops in the II bulls-minus-bears line since 2010, the SPX went on to average a one-week loss of 0.95%, and was higher just 50% of the time. That's compared to an average anytime one-week gain of 0.22%, with a 59.2% win rate. A week after the February signal, the S&P was down 2.04%.

One month later, the S&P was down 1.23%, on average, and higher just 37.5% of the time. That's compared to an average anytime gain of 0.87%, with a win rate of 65%. A month after the last signal, in fact, the SPX was 5.79% lower.

However, longer-term, four consecutive drops in the II bulls-minus-bear line has preceded stronger-than-usual returns for the S&P 500. Three months later, the index was up 4.84%, on average, compared to 2.94% anytime. Six months later, the SPX was higher by 7.81%, on average, compared to 5.93% anytime. At both points the S&P was up a better-than-usual 85.7% of the time after a signal.

spx after ii signal vs anytime since 2010

In conclusion, a four-week slide in the Investors Intelligence bulls-minus-bears line tends to be a self-fulfilling prophecy for the stock market, with the S&P typically enduring near-term headwinds. However, if recent history is any indicator, buyers could eventually rush back in from the sidelines, helping the index reclaim some ground -- and then some -- over the next six months. In any event, the recent spate of headline-driven volatility creates some opportunities for premium sellers and day traders alike, per Schaeffer's Senior V.P. of Research Todd Salamone.

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