Investors Intelligence analysts have tracked the views of stock market advisory newsletters for over four decades. This unique study provides a valuable insight into the peaks and troughs of investors sentiment and is utilised as a medium-long term market timing tool.
When the survey was developed by our founder, AW Cohen, he originally expected that the best time to be long the market was when most advisors were bullish. This proved to be far from the case – a majority of advisors and commentators were almost always wrong at market turning points. Quite simply, professional advisors are just as susceptible to market emotions as individual investors – they become far too greedy at the top of trends and far too fearful near the bottom.
A contrary indicator…but only at extremes. We don’t necessarily take a contrarian view to the newsletter writers in our survey. A large part of the time our sentiment readings remain neutral. We consider the norm to be 45% bulls, 35% bears and 20% neutral. However, we do pay attention to extreme readings in both bulls and bears and also to historically significant runs of more bulls than bears. To summarize, advisors are only wrong when you get too many of them start thinking the same thing.
Here's our report from June 7, 2006.
The % of bulls fell for the third week, now down to 40.2%, from 42.6% last week. This is fewest bulls since late August 2004, when they totalled just 39.6%. This is a very positive reading for stocks, well below the 45% that is usually low enough for a positive reaction. The bulls are down from their recent peak of 53.2% shown eight weeks ago.
The bears rose to 31.5%, from 29.8% a week ago. This is the highest reading since 10-March 2006, when we counted 33.0%. The formerly bullish advisors are now getting bearish and that is a positive.
Those calling for a correction were up to 28.3%. This is still a high reading for this group and reflects the fact that many of the previous bulls have moved here instead of to the bearish camp. This group is short term bearish, but view pullbacks as buying opportunities, and long term expect the market to go up. A complete table of the Advisory Sentiment appears on the final hotline page.
During a rising market we consider 45% as “normal” for the bulls and 35% for the bears. The bulls were below that level for three week in early March, prior to two weeks ago.
Historically, bulls are 55%-60% when indexes achieve record highs, and those extreme levels of optimism often prove negative. They reflect fully invested positions. High levels of bearishness are usually positive because they most often occur after a major market decline, and reflect that there is plenty of cash on the sidelines. The last time that occurred was October 2002, when bears were almost 15% above the bulls [DJIA 7500]. During the range bound market over the last few years, short term opportunities have been indicated after the spread between the bulls and bears contracted to 15% or lower, and then expanded. A wide difference around 40% has proved negative.
The difference between the bulls and bears narrowed sharply to 8.7%, from 12.5% last week and 16.2% the week before. It may contract further, but readings around this level have proved to be opportune times to take long positions.
