Market Sentiment is No Where Close to a Buy Signal. The bulls dropped to 54.8%, from 59.0% last issue. Late Aug saw 61.5% bulls, their highest reading since Sep-2018 at 61.8%. (Mid Jan-20 saw them up to 59.4%.) Our rules says above 55% bulls needs defensive measures – tight stops at the minimum and possibly some selling among shares with big gains. Bulls 60% and above signal increased danger the higher they get, and the need to prepare for a market decline. Sentiment top signals can take months before markets decline. The final Aug bull count was up substantially from just 30.1%, shown near the 23-Mar market lows. That was the fewest since Dec-2018 ended with a similar 29.9% count. Bulls near 30% say cash is high after a market tumble for a lower risk buying chance. The signals for market bottoms occur much more quickly than indications for market tops.
The bears increased to 18.3%, from 16.2% a week ago. That equaled their 2½ year low shown twice in Aug. The new bears moved from the correction outlook, raising more cash and now projecting a resumption of the Mar selloff. Very low bearish readings do not suggest strong rally potential. Lots of bears do! Now we await a further buildup in their reading to signal a bottom. That occurred as stocks tumbled to late Mar lows, with the bears jumping to 41.7%. They also outnumbered the bulls for three straight weeks to signal a buying chance. That situation has been rare since the 2008-9 financial crisis. Similar elevated bearish levels were also shown Dec-18 and Feb-16, when other market selloffs ended. Bears below 20% are not favorable for longs, while high readings, especially when they exceed the bulls, are indicative of market bottoms.
The bull-bear difference narrowed to +36.5%, from +42.8% last issue. That ends five straight +40.0 spreads, which signaled elevated risk and a potential decline. Aug ended with the widest spread since Jan-2018 when it exceeded 50%! In contrast, the Mar-20 lows had a -11.6% negative difference. Then the bears outnumbered the bulls for three weeks. That has been rare since 2009. Negative spreads point to lowered risk for longs the larger they get! Other similar buying chances were -4.7% in Dec-18, -14.5% in Feb-16 and -25.0% in late Oct-08. In contrast, that Jan-20 peak spread was followed by a mid-Feb-20 reading at +35.8%, as indexes hit repeated highs to start this year. Above +30% counts show more risk the higher they get, with defensive measures appropriate above 40%. Prior to +41.5% in Jan this year we saw a +43.2% spread late Sep-18, just before the S&P 500 corrected 19.7% to its Christmas Eve low that year.