2023-03-29 10:02:04 ET
Summary
- The granddaddy of all sentiment surveys, with a history back to 1963, is still pointing to higher prices.
- While Investors Intelligence now shows three bullish writers for every two bears, we don't believe it's enough to indicate another leg down in a bear market.
- However, we are at a critical juncture. If nothing unexpected happens we should continue higher. If there's a sudden financial or political crisis, it will probably trigger another wave lower.
Last December we wrote an article on the granddaddy of all sentiment indicators – the Investors Intelligence survey of newsletter writers. It's the oldest sentiment survey there is with a history back to 1963. It has a good track record of locating the end of bear markets. The article contained the full history and explanation behind the survey.
The article's title was, “The Granddaddy Of All Sentiment Indicators Is Signaling A Bull Market” and it explained the rationale behind the bullish conclusion. This latest article will bring all the information up to date.
The Investors Intelligence Survey
Ratio of Bearish to Bullish Newsletter Writers (Michael McDonald)
Since 1963, Investors Intelligence has been monitoring newsletter writers and classifying them as either bullish, bearish, or "we're in a correction." They first tabulated monthly numbers, then biweekly, then, in 1971, weekly numbers. They found the numbers act in a contrary way, with high levels of bearish expectations at the bottom and a high percentage of bullish expectation at the top.
The graph above plots the ratio of the number of bearish writers to bullish writers back to 1980. The black line across the graph represents one for one, so numbers above the black line means more bears than bulls and numbers below more bulls than bears.
As you can see, most of the time newsletter writers are more bullish than bearish but sudden peaks in the ratio represents moments when this changes. These sudden peaks usually occur at major price lows.
A Closer Look
We provided that first chart to show you a significant segment of its long-term history. The second chart zooms in and shows you the indicator from more recent times - from 2007 to present.
Closer Look at the Newsletter Writer Ratio - 2007 to Present (Michael McDonald)
We've highlighted with black arrows five times since 2007 when the ratio went above one, indicating more bearish writers than bulls. You must remember these newsletter writers are long term forecasters, most do not forecast short term trends.
It was the two high ratios in June - October of last year, indicated by the last two arrows on the right, that prompted the December article and its conclusion. Since then, the ratio has fallen to .66, which means there's currently two bearish newsletter writers for every three that are bullish.
So, the ratio is now mid-range and not signaling anything at the moment. But this is somewhat normal after reaching an extreme ratio, as you can see in the chart. After a new bull market begins, the ratio slowly falls away from extreme reading and it takes a while for it to work its way to where the ratio is more like 4 bulls for every one bear.
It's also important to notice that extreme bearish ratings don't last for long periods of time. They tend to spike and are over with rather quickly. We had that last year. Although it could happen, it would be very unusual after last year to have the market fall again and produce another extreme reading. In all likelihood the buy signals last year were the start of the new bull market.
Easier to see with SK Ranking system
Investors intelligence is one of the nine indicators that make up our master sentiment index. To combine it with the other eight, we put it on the Sentiment King ranking scale, which is the same scale we use for every indicator. Its ranking on the scale is shown below.
Newsletter Writer Ratio graphed on the Sentiment King Scale (Michael McDonald)
The SK ranking scale goes from -10 to +10. A number between -9 and -10 means the indicator is within 95% of the highest ratios since the indicator began. Between -8 and -9 the next highest 5%, and so on. The Red and Green zones represent the extreme ratios of newsletter writers. Notice that the current reading of -1 is right in the middle of all historic numbers.
There is no doubt Investors Intelligence is usually better at locating market lows than market tops. It gives early Red zone signals far before the final price top. But we aren't even near the Red zone after the two strong buy signal of last year. In our opinion if one accepts the validity of last year's buy signals according to this indicator there is nothing to worry about at this time.
However, we are at a critical juncture. If nothing unexpected happens we should continue higher. If there's a sudden financial or political crisis, no matter what investor sentiment is indicating, it will probably trigger another wave lower.
For further details see:
What's The Granddaddy Of Sentiment Indicators Saying Now?