The Sentiment Siren Sounding for the First Time in 30 Years

The weekly Investor Intelligence (II) sentiment poll last week showed optimism creeping higher yet again, sending one sentiment indicator that we track to its highest point in 30 years. Against this backdrop, we decided to take a look at how the stock market performs after these relatively rare sentiment signals.

Weekly II Results

The percentage of bullish II advisors last week rose to 62.3% from 60%, the highest point since late February, and well above the average reading of 47% since 2005. The percentage of bearish advisors edged just slightly lower, to 15.1% from 15.2%, matching the Oct. 10 reading, which marked the fewest number of II bears in at least a year. The percentage of II advisors expecting a correction in the market fell to 22.6% from 24.8%, for its lowest reading since late February.

II Bulls-Minus-Bears Line at Highest Point Since 1987

As such, the bulls-minus-bears line rose to 47.2% from 44.8%, to its highest point since January 1987, and in the 97th percentile of all readings, according to Schaeffer's Senior Quantitative Analyst Rocky White. The last time the bulls-minus-bears line topped 45% was late February, which marked the first signal in two years. In fact, there have been only 12 other signals since 1964 (when we have II data), according to White, considering only the first time the 45% line was crossed in the past six months.

SPX After Sentiment Signals

However, while optimism is potentially dangerous when it indicates the "euphoria" phase of the sentiment cycle that coincides with market tops, S&P 500 Index (SPX) returns after previous II signals are encouraging.

One month after the last 12 signals, the index was up an average of 2.32%, and was higher 75% of the time. In fact, that's the lowest percent positive we measured looking one year after signals. For comparison, the average one-month gain after a signal is nearly three times the SPX's average anytime one-month return of 0.59%, going back to 1964.

The SPX is most likely to be positive three months after the II bulls-minus-bears line peaks above 45% for the first time in at least six months, with a win rate of 91.7%! That's compared to the SPX's average three-month percent positive of 64.9%. Further, the index's average post-signal gain of 4.59% is more than twice its average anytime three-month return of 1.91%.

It's a similar story looking at six-month and one-year returns after a signal, with the SPX in the black more than 80% of the time at both checkpoints, and sporting higher-than-usual average returns. It's also worth noting that Standard Deviation across the board is lower than usual after a signal, suggesting the stock market could continue its recent trend of grinding to record highs amid lower-than-usual volatility.