Frothy Bulls

June 4th, 2014 6:32 pm | by John Jansen |

The WSJ reports that bullish sentiment in the stock market is reaching rarified levels which in past cycles have augured for severe corrections. Prior highs came in August 1987 and October 2007.

Via the WSJ:

Danger Territory’: Bullish Sentiment Hits Extreme Levels

Bloomberg News

Will the last bear left standing please turn out the lights?

Bullish sentiment jumped to relatively rare territory this week, suggesting optimism has engulfed Wall Street as U.S. stocks continue to ratchet up to new highs.

The percentage of financial advisers who are bullish on the market jumped to 62.2% from 58.3% a week earlier, according to a weekly poll conducted by the Investors Intelligence firm. That marks the fifth straight week this indicator has been above the key 55% level, suggesting sentiment is getting a bit frothy.

This week’s reading puts the market in “danger territory,” says Investors Intelligence, which tracks stock-newsletter writers. The current level exceeds last year’s high-water mark of 61.6% at the end of December. Prior highs, the firm notes, came in August 1987 (60.8%), October 2007 (62%) and December 2004 (62.9%). All of those instances occurred after big rallies and prior to sizable corrections.

“Sentiment now signals danger although not necessarily an immediate market drop,” says John Gray of Investors Intelligence.

Bearish sentiment, meanwhile, dropped to 17.3% from 18.3% around remains around historically low levels.

The S&P 500 recently rose 3 points to 1927, continuing its gradual climb higher. The index is up more than 4% for the year, has risen in four straight months and seven of the past eight. The S&P 500 hasn’t had a 10% correction since the second half of 2011.

The rally has coincided with extremely low levels of risk aversion and market volatility, which have led some market watchers and Fed officials to wonder if the markets have become complacent. As WSJ reported, several Fed officials have started to wonder whether investors have become unafraid of the type of risk that could lead to bubbles and volatility.

“The extraordinary faith in central banks has put market sentiment amongst professionals…in rarefied air,” said Peter Boockvar, managing director at The Lindsey Group. “The stock market bull boat of professionals is back to being standing room only.”

High levels of bullishness, by themselves, don’t suggest the market is necessarily due for a fall. But when so many folks start thinking and acting one way, the market usually does the opposite. As we noted earlier this week, Goldman SachsGS +0.36% has said that its clients seem to have reached a consensus on stocks, bonds and the economy these days, with all sharing similar views.

“Rising optimism, low cash reserves and high valuations argue against chasing stocks in June,” says Bruce Bittles, chief investment strategist at R.W. Baird & Co.


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