Sentiment Signal Also Flashed Before August 2015 Crash

The II bulls-minus-bears line just broke a record streak

Nov 23, 2018 at 9:13 AM
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Back in September, when the major stock market indexes were still flirting with new highs, optimism on Wall Street was unsurprisingly elevated. Specifically, the number of bullish newsletter advisors surveyed in the Investors Intelligence (II) poll was at its highest point since January. However, unless you've been hiding under a rock, you're aware that stocks have since taken a turn for the worse -- and the latest data indicates a major spike in skepticism. As such, one sentiment signal is flashing for the first time in two years. Here's what that could mean for the S&P 500 Index (SPX).

The percentage of II bulls fell 3.3 percentage points last week, to 39.6% -- the lowest level since May 2016. The bulls-minus-bears line is now below 20%, something we haven't seen since November 2016, just before the presidential election.

Last week's break snapped the longest stretch on record, at 105 weeks with the bulls-minus-bears line above 20%. The last time the bulls-minus-bears line breached this level after spending at least six months above it was on Aug. 14, 2015, just before stocks crashed, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. There have been just 12 other signals of this kind since 1966, with four of those occurring since 2011.

SPX with II signals since 2010

SPX after II bulls-bears line drops

After the most recent II signals, the S&P has underperformed. One week later, the index was down 0.76%, on average, and higher just 50% of the time. That's compared to an average anytime one-week gain of 0.2%, looking at data since 2011, with a win rate of 59%. Three months after signals, the index was up just 0.36%, again with a win rate of 50%. That's compared to an average anytime three-month return of 2.68%, with 75.6% positive. And it's a similar story six months later, with the average return after a signal roughly half of its anytime return.

The outlier is SPX performance one month after signals. Since 2011, a drop in the Investors Intelligence bulls-minus-bears line below 20% has preceded a one-month SPX rally of 2.79%, on average, with the index higher 75% of the time. That's more than triple its average anytime one-month gain of 0.8%, with a win rate of 65.4%.

SPX after II signals vs anytime since 2011

In the near term, however, traders should take their cues from the S&P 80-week moving average. As Schaeffer's Senior V.P. of Research Todd Salamone has noted on several occasions, this trendline has been a demarcation point between bull and bear markets. A weekly close below this trendline would suggest heightened risk of bearish action over the intermediate to long term.






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