We use investor sentiment as a contrarian indicator of the stock market’s direction. Smart Stock Market Investors Beware. The latest Investor Intelligence Bulls/Bears poll of stock market newsletter writers shows increased bullishness, which is a negative since these writers are usually wrong.
Even more worrisome for stocks is the fact that corporate buybacks, which have been the major support of the market, are down sharply, according to TrimTabs Investment Research. It reports that corporate buying has slowed significantly since August, and new announced stock buybacks plummeted to their lowest level since May 2012. What does that mean? Bad news for stocks. Corporate executives are increasingly pessimistic about their companies’ future revenue and earnings growth, and unwilling to risk their profits buying their own stock.
Aa for the Bulls/Bears poll, bullish sentiment jumped to 50.0% from 44.9% a week ago. That 50% level means investors should begin taking defensive positions, while 55% historically means the market is in extreme danger with little cash left in portfolios to support upward gains. Other negatives are that bearish sentiment went down to 17.9%, after two weeks at 18.7%, while the spread between bullish and bearish sentiment expanded to +31.2% from +26.2% (see chart). That jump to more than +30% is another indication investors should be increasingly cautious.
Meanwhile, another note of caution comes from the direction of the Smart Money/Dumb Money Confidence Spread (see chart) derived from the action of good and bad investors. Its drop to -0.27 means it is heading from neutral to somewhat bearish.