2023-07-12 13:15:50 ET
Summary
- The Investors Intelligence sentiment survey shows 54.9% of newsletter writers are bullish, 18.3% are bearish and 26.8% favor a correction.
- The current ratio of bearish to bullish advisors is 0.4, meaning there are two and a half times more bulls than bears, a stark contrast to last year's bearish sentiment.
- Despite nearing the 'Red Zone', which indicates too many bulls, the indicator suggests the eight-month market advance should continue. Investors are generally advised to stay invested long term.
The Investor Outlook series focuses on specific indicators that measure what investors are thinking and doing about the market. This article looks at the Granddaddy of all sentiment surveys – Investors Intelligence.
On December 16th of last year, we wrote an article titled, 'The Granddaddy Of All Sentiment Indicators Is Signalling A Bull Market." The indicator is published weekly by Investors Intelligence and goes back to 1963. We call it the “granddaddy" indicator because of this long history.
With the accuracy of that prediction, it's time to see what it’s signaling today.
Advisors Sentiment
Every week Investors Intelligence compiles what newsletter writers are saying. Overall, they show 54.9% bullish, 18.3% bearish and 26.8% favoring a correction. The headline is, “Editors increasingly suggest buying stocks!”
Ratio of Bearish to Bullish Newsletter Writers (Sentiment King)
The above chart shows the ratio of bearish advisors to bullish advisors back to 2007. The black, horizontal line representing when the ratio is one to one.
In our chart we use a moving average of the weekly numbers to smooth out the results. For a complete history of the indicator, readers should read the December article; it contains all the details which are too much to include in this update.
Current Readings Show Two and a Half Time More Bulls Than Bears
The current ratio is .4, which means there are two and half times more bulls than bears. This is in stark contrast to last year when ratios went considerably above 1.0.
We've indicated with black arrows how these extreme bearish readings correspond to bear market lows. It was last year’s extreme readings which signaled the start of the bull market and prompted the December article. But conditions today are different.
The Sentiment King Ranking Scale
The next chart shows where the current ratio of .4 ranks on an historic basis. That's the SK scale. It's the same numbers but graphed on the Sentiment King ranking scale.
Newsletter Writer Ratio on Sentiment King Ranking Scale (Sentiment King)
Red Zone readings indicate too many bullish writers, while Green Zone readings mean too many bears. Essentially Green Zone readings show when to buy and the Red Zone when to be cautious.
The large white band in between represents neutral readings. It’s important to note that the indicator only has meaning when it's at an extreme. I've learned over many years never to “stretch” a reading, trying to make it “say” something when it's not at an extreme.
As you can see, the current reading, indicated by the small black dot, is rapidly approaching the Red Zone but it’s not there yet. In our opinion this is a strong indicator that the eight month advance, while getting a little long-in-the-tooth, has further to go. Following this indicator, one should stay fully invested long term.
However, it's never good to base any decision solely on one factor. This is why we rely on the Master Sentiment indicator when making long term decisions. The Master Indicator is a composite made from nine sentiment indicators, one of which is Investors Intelligence. We will be updating that on Sunday.
Summary
The granddaddy of all sentiment indicators is signaling that the current eight months rally probably has further to go. We could be near a short term peak, but long term this well tested indicator says the market is going higher.
For further details see:
Investor Outlook: What The Granddaddy Sentiment Indicator Is Saying Now