Thursday, November 6, 2014

Is Sentiment Too Bullish? (excerpt)

In the past, when sentiment, as measured by the Bull/Bear Ratio compiled by Investors Intelligence, was too bullish, the market often took a fall. Contrarians tended to turn bearish when the ratio rose to 3.00 or higher, and bullish when it was down to 1.00 or lower. Previously, I’ve demonstrated that the ratio works better as a contrary buy signal than as a sell signal.

In the current manic environment, I doubt that it will be a very useful sell signal. That was demonstrated by the latest correction, in my opinion. The Bull/Bear Ratio whipsawed from a recent high of 4.22 during the week of September 2 down to a low of 1.94 during the week of October 21. It rebounded to 3.62 this week. Most of the swings down and up were attributable to bulls jumping into the correction camp and then back into the bullish one. Remarkably, bearish sentiment has averaged just 15.4% since the start of September, the lowest since 1987, and below readings during the financial crisis of 2008-2009.

Today's Morning Briefing: Mood Swings. (1) Manic-depressive disorder. (2) Computers vs. humans. (3) Algorithms reading the headlines. (4) Bull/Bear Ratio’s latest bungee jump. (5) The bears have left the building. (6) The fourth phase of the bull market. (7) Don’t fight the central banks. (8) Don’t fight the political cycle. (9) Congressional mid-term elections and third years of presidential terms tend to be very bullish. (10) SMidCaps are rising and outperforming again for a couple of good reasons. (More for subscribers.)

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