Rare Sentiment Signal Could Mark Buying Opportunity

How the S&P performs after a bearish extreme in the Investors Intelligence poll

Senior Quantitative Analyst
Jan 9, 2019 at 12:00 AM
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For the first time in nearly three years, the weekly Investors Intelligence (II) survey showed more market newsletters were bearish on stocks than bullish. The survey started in 1963. II analyzes more than 100 independent newsletters and determines whether they are bullish or bearish on the stock market (they also have a third designation of those that are short-term bearish but longer-term bullish). In other words, they have a good amount of history on how investment professionals feel about the market. This week, I’ll look at how the stock market performs when the II sentiment survey behaves like this.

II Bears Overtake Bulls

The chart below shows the collapse of the bulls compared to the bears in the II poll. The last time the bulls-minus-bears line was below 0% -- indicating more bearish than bullish respondents -- was early 2016. Eyeballing the chart, it seems a majority of bearish newsletters suggests we’re at or close to a buying opportunity.

SPX with II bulls-minus-bears line

SPX After II Signals

To get some numbers behind this analysis, I looked at prior instances when the bulls-minus-bears line fell below 0% for the first time in at least a year. Going back to 1963 (as far back as the II data), there have been 12 other occurrences. The table below summarizes the S&P 500 Index (SPX) returns going forward.

The data confirms our eyes. The S&P 500 averages a gain of 8.76% over the next six months after these signals, with three-fourths of the returns positive. The second table shows the typical six-month return has been 3.88%, looking at anytime data since 1965, with about 68% of the returns positive. Looking at the three- and six-month returns, the summarized returns after a signal beat the typical returns in every single data point, from average return to average negative.

SPX after II signals vs anytime

Finally, here are the results for each of the individual signals. There has been some amazing consistency in the three-month returns lately. Each of the three signals post-financial crisis have resulted in returns between 8% and 9%. Historically, bearishness in these newsletters, as measured by Investors Intelligence, have been a reliable contrarian signal.

SPX II signals since 1965

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