Are Investment Newsletters Too Bullish?

The II survey currently shows an extreme amount of optimism

Senior Quantitative Analyst
Mar 20, 2024 at 8:00 AM
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A popular sentiment poll we monitor is the weekly sentiment survey published by Investors Intelligence (II). They obtain numerous published newsletters, emails, bulletins, etc. that go to clients giving stock market advice. Then they determine the percentage that are bullish or bearish or expecting a correction (short-term bearish but longer term bullish). The survey currently shows an extreme amount of optimism. This isn’t surprising given the S&P 500 Index (SPX) has been consistently hitting new all-time highs for a couple months now. But the survey has recently hit a few significant milestones, making me wonder whether similar occurrences in the past have signaled potential risks ahead.

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II Percent Bulls at Extremes

The percentage of bullish newsletters from the II poll was above 60% in the latest report. It’s the first reading above 60% since July 2021. It’s an extreme reading registering in the 95th percentile for percentage of bulls going back to 1971. The tables below compare how the S&P 500 has performed after newsletters are extremely bullish on the market or extremely bearish. The poll has been a reliable long-term contrarian indicator. When the bulls are extremely high, the S&P 500 averages a 6.8% return over the next 12 months, with 68% of the returns positive. When there’s a dearth of bullish newsletters, the index averages a return of 14% with 80% of the readings positive.

There’s not a lot of difference in the average return and percent positive when you look at the shorter-term time frames (out to six months). There is significant difference, however, in volatility. Looking at the average positive and average negative figures, our current situation shows less volatility going forward, which is reflected in low implied volatilities (IV).

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For reference, the table below shows S&P 500 returns when the percentage of bulls is between extremes. Based on all these figures, I would say buy and hold investors might lower expectations a bit going forward. But for shorter-term traders, the numbers don’t mean too much.

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This next table shows how the S&P 500 performed after the II bullish percentage reached 60% for the first time in at least six months. This just occurred in the latest report. These figures are more concerning. There have been 19 occurrences. The index averaged a loss of about 0.5% over the next month with less than half of the returns positive. The three-month return barely averaged breakeven. The six-month and 12-month returns are positive, but underperform typical S&P 500 returns significantly.

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Bearish Newsletters Disappearing

The percentage of bearish newsletters is at an even more extreme. The recent report saw the bearish newsletters drop below 15% for the first time in over six years (February of 2018). The table below shows how the S&P 500 performed after the percentage of bearish newsletters dropped below 15% for the first time in at least six months. These 10 occurrences have tended to lead to short-term bullish returns, out to three months, but then longer-term returns that are just typical.

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Finally, below, I have the dates in which the II survey showed at least 60% of newsletters bullish and less than 15% bearish, which is our current situation. It shows instances where it was the first such reading in at least six months. The last time was in 2017, in which the market was great for a few months before a pullback resulted in a one-year return of just 2.3%. Ominously, the time before that was early 1987, less than a year from the biggest one-day drop in the history of the S&P 500 (Black Monday in October of 1987). Overall, however, those short-term returns have been very bullish. So, maybe there are some gains to be made in the near future.

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