We use investor sentiment as a contrarian indicator of where the stock market is headed because investors historically are wrong. Based on the latest sentiment indicators we continue to advise investors to remain cautious, particularly in these times of volatile, roller coaster markets in which new stock lows greatly outnumber new stock highs. We should also note that markets often turn weak in late October.
So where is investor sentiment now? The Investors Intelligence Bulls/Bears poll of more than 100 market newsletters shows bullish sentiment increased to 49.1% this week after falling to 47.6% last week. Bullish sentiment above 50% is worrisome in terms of market direction. Bullish sentiment above 55% is a signal investors should take defensive action. Meanwhile, bearish sentiment remained very low at 17%, compared with the prior 17.2%. Bearish sentiment below 20% historically means the market has not yet reached a bottom and is not safe for broad buying programs.
Meanwhile, the spread between bullish and bearish sentiment in this poll (see chart) expanded slightly to +32.1% from 30.4% the prior week. Spreads above 30% are warning signs. Spreads above 40% mean investors should start taking defensive measures.