Bears At Their Lowest Level Since 1987.  Now What?

September 3, 2014 1:29 PM

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Bears At Their Lowest Level Since 1987.  Now What?

The big news today isn’t coming from the economy or world events, it is the fact the number of bears in the US Advisors’ Sentiment Report came in at their lowest level since February 1987 at just 13.3%.

This matters because many use this poll as a contrarian indicator.  The thinking goes if there are no bears left, then we could be near a major peak as there is no one left to buy as everyone is bullish.  Lastly, this poll looks at what newsletter writers are thinking.  

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Then the fact the last time the bears were beneath 14% was in 1987 and you have all the ingredients for an intriguing headline as well.  Now before you go out and sell all your stocks, remember the S&P 500 (SPX) gained +16.6% the six months after the late February signal in 1987.  Sure, we had the one-day crash of 20% later in October, but there were some spectacular gains to be had for a long time first.

My point is it is so hard to truly quantify exactly what this means or when it truly becomes bearish.  Sure, it is a major concern, as too many could be getting excited right at the wrong time.  The best time to have been buying was probably a month ago when everyone was in a panic that the long-awaited 10% correction was finally coming.  

Going back to 1970, I looked at all the times the Bears dropped beneath 14%.  Most of these happened in clusters, so I took just the first signal and there had to be at least two months go by without another signal for the next one to count.  Again, this is done just to remove clusters.

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Pretty weak returns across the board.  Flat a year later isn’t going to do much for the bulls.  

Now considering September seasonality is a worry, combined with the crowd getting a little to bullish, it all could make the next few weeks a bit tougher to see big gains.  

I’ll leave you with this thought.  Technically, I continue to see very few problems with the market.  One of my favorite indicators is the cumulative advance/decline issues at the NYSE.  When you have many issues advancing, this usually means the overall market will follow suit.  Not much wrong with this picture.  

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Now does this negate the bullish sentiment and weak seasonality?  I have no clue, but I think it suggests we won’t have a massive drop in September like we saw in ‘11 (-7%) and ‘08 (-9%).  

Photo courtesy of Jeff Block.  

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