This indicator may not signal a bull market now

The survey of investment advisors of Investors Intelligence  shows the percent of bulls and bears. The evidence shows the market tends to rally when the ratio of bulls/bears is at extremely low levels (as now). Stocks stop rising  when the ratio of bulls/bears is at extremely high levels (as in 2011). (See above chart - click on the chart to enlarge it).

Although this is a great indicator, it does not work well all the times. Let me show you why.

In the bear market of 2008-2009, for instance, the bears/bulls ratio declined to bullish levels in 2008. The market, however, did not rally and kept declining. It eventually bottomed in 2009 with the bulls/bears indicator still at extreme low levels.

The point is extreme low levels of the bulls/bears indicator does not provide a useful timing signal if the market enters a protracted downturn.

The same pattern occurs in a protracted bull market as it happened during 2013-2015. The bulls/bears ratio reached extreme high levels, reflecting a large number of bulls. The market should have corrected, but it did not. Stocks kept rising strongly as advisers remained overwhelmingly bullish. 

The point is financial advisers are momentum followers. When the momentum is strong, they follow the market up. When the market is weak they follow it on the downside.

What is this indicator saying now? The bulls/bears ratio is at extreme low levels. The advisers are worried and their concern is at levels that may reflect a change in trend as in 2008-2009. They may be right. On the other hand, they may signal a strong rally as they did in 2013.

I know, it is confusing, but this is exactly the limitation of this indicator.

The way I would use this gauge now is as follows. Yes, the market is oversold and it may bounce higher. However, the advisers may also be telling the market trend has changed and momentum may have shifted on the down side.

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Thank you for visiting this site.

George Dagnino, PhD
The Peter Dag Portfolio
Since 1977 
Author, Profiting in Bull and Bear Markets

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