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Parsing The Investors Intelligence Bullish Sentiment at Trader’s Narrative

One of the key sentiment surveys that many watch is the Investors Intelligence survey compiled by ChartCraft. I monitor it as well but I’m mindful that it needs to be read in its own proper context. For the past few weeks I’ve been mentioning the level that is important to watch for. In last week’s sentiment overview I wrote:

The latest Investors Intelligence survey from ChartCraft showed the bullish camp rising to 54.0% from 53.3%. The bears are at 18% (a slight decrease from 17.4%). This is the largest portion of bulls from the II survey since early 2008. As well, the bull ratio this week is 3:1 for the second consecutive week - a level which has in the past corresponded with market tops.

Instead of looking at the bull ratio (II bullish sentiment divided by the total of bullish and bearish sentiment) a more simple measure is to look at the spread (bull minus bear). Here is a chart, courtesy of Investors Intelligence, showing this spread going back to 2000:

investors intelligence sentiment May 2010

Tarquin Coe, Market Technician at Investors Intelligence argues that this isn’t as bearish as you would at first imagine:

The Investors Intelligence Advisors Sentiment Survey bull-bear spread is moving towards the 40 danger zone. When the spread last broke above 40, in October 2007, the market topped out. However, the market in October 2007 was at a different stage in the bull’s “life-cycle” to where we are now. There were comparable periods to the current market when the bull-bear spread broke above 40 during 2003, 2004, and 2005.

The table below shows the outcome for those periods, in terms of duration and degree of correction. Readings during May could prove to be most significant for some time as once that spread exceeds 40 investors need to look at positioning their portfolio for a sideways market that could last for months.

table of II spread May 2010

The distinction that Coe makes is an important one. It also confirms the myriad other technical reasons we’ve already discussed for the primary trend to continue to be up. But that doesn’t mean that we won’t see a correction as a result of this much lopsided bullishness.

Another technical metric kept by ChartCraft for the past 20 years is the number of weekly buying and selling climaxes. The end of April had the most buying climaxes ever recorded - that should make any technician stand up and take notice:

A buying climax by the way is when a stock makes a new 52 week high and then closes the week lower. Considering that 40% of the stock market hit new 52 week highs (a new record going back to the birth of the 1980’s super-bull market) this isn’t all that surprising. But it adds to the already existing expectation for a correction.

buy sell climaxes May 2010

Since this correction is not in the least a surprise, having been expected for some time now, the curve ball that the market could throw at us is that it isn’t really a correction but the start of something much more ominous. For more on that see Matthew Claassen’s recent commentary- if you haven’t already.

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4 Responses to “Parsing The Investors Intelligence Bullish Sentiment”  

  1. 1 thomas

    Investors Intelligence has about a week to a 1 1/2 week lag. It’s newsletter writers and II tends to put in snippets of a newsletter with date of newsletter. Expect a large drop next Wednesday as newsletter writers will likely turn less bullish.

  2. 2 Clarence

    Babak, I found it illuminating to revisit your quantdna post of March 19th. That post has been in the back of my mind as the market rallied to the end of April. As they stressed, it would be a process rather than an outright sell signal.

  3. 3 Doctor Stock

    Thanks.. interesting post.

  4. 4 Thomas Thornton

    the buying climax issue made me send a “holy sht” headline when I sent out to my firm on Monday… nobody cared but me

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