Investor Sentiment Rising Optimism Raising Red Flags. We use investor sentiment as contrarian indicators because the average investor usually is wrong about the stock market’s direction. So it is worrisome that Investor optimism was up again this past week. Apparently naïve investors continue to be lured into complacency by record and near-record highs of the major indexes, ignoring, or ignorant, of the underlying market weakness exemplified by the fact that more stocks on the Nasdaq and NYSE once again went down than up.
So despite the markets’ underlying structural difficulties, the Investor Intelligence survey of market newsletter advisors shows bullish optimism increasing to 58.1% from 57.2%. This is the fourth week above 55%, signaling the need for defensive measures including tight stops and selling some shares with large gains. The latest reading exceeds the mid-July peak of 58% before the markets sold off to their August lows. Bearish sentiment was again very low, at 17,1%. For the seventh week the bull-bear spread expanded, ending at +41.0%, from +40.1% a week ago (see chart). This is the second bull-bear spread above 40%. It nearly equals the reading in mid-July before the August selloff. It is another clear call for defensive measures.