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Sometimes Excessive Bullishness is BULLISH!
Sentiment Commentary for 4-8-14
by Mark Young


I've been at the "sentiment game" now for something like 25 years. I have used sentiment as a contrary indicator, and done so profitably. There is a lot of validity to the old adage, "If everyone has bought, who is left to buy?" But that doesn't tell the whole story.

Sometimes, excessive sentiment is less about over-exposure and more about market participants hitting a "point of recognition". Let's stop a moment and think about it; the stock market isn't merely a bunch of random buy and sell decisions, right? Prices go up or down, generally, for a reason. There are times when a large majority recognize an important change in the investment landscape. Just because a lot of people can see a change in the market doesn't mean that change is going to go away.

Let's look at a real life example. Back in the spring of 2003, the market had been going down for 3 years. When the market turned up, investors (as measured by Investor's Intelligence) fairly quickly went from being fairly Bearish to outright Bullish to excessively Bullish by late April, early May. Rather than this being a good time to Sell, it was instead a good time to buy, as stocks rallied essentially non-stop for 10 months thereafter.

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(Chart courtesy of Stockcharts.com and DecisionPoint.com)

Clearly, that "excessive" Bullishness didn't represent over-exposure so much as point of recognition for many analysts.

We have noticed something similar on a short-term time frame with our message board poll data. Each evening, we poll the active traders and speculators on Traders-Talk on not only their view of the market, but also their exposure levels. As you might guess, excessively Bullish or Bearish results can sometimes help pin-point short-term market tops and bottoms.

We have found, however, that when Bullish exposure levels are extremely high, very often prices can expected to rise the next day. That's right. Really excessive Bullishness is a Buy signal. How reliable? The last 15 signals hypothetically produced 11 winners, 2 losers, and 2 break evens using a rudimentary system for measurement purposes.

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The interesting part is that, as you can see from this chart of our message board Fully Long vs. Fully Short percentages, excessive readings are still fairly reliable fades on a short-term basis, but REALLY excessive readings (circled) are just the opposite. It's somewhat counter-intuitive, which may make it more reliable.

In any case, it is important to remember that while traders are prone to get overly confident at the wrong time, many times when they move en masse into a given position, there's good reason. There's reason to believe that this phenomenon is not limited to Investors Intel and our daily sentiment polls. Don't let excessive bullishness lull you into uncritical Bearishness. It pays to take a more nuanced and contextual approach to stock market sentiment.



Mark Young publishes Wall Street Sentiment Daily and Weekly and manages Traders-Talk.com, an online community for traders, analysts, and investors. If you would like to receive a trial subscription to Wall Street Sentiment Daily to sample the unique and proprietary sentiment indicators that we use to make outsized gains, simply go to this link and sign up. http://wallstreetsentiment.com/trial.htm
 
   
   
   
 

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