With U.S. stocks on a historic tear to start 2018, signs of extreme stock market optimism continue to pop up. For instance, a recent American Association of Individual Investors (AAII) survey recently sent up a “huge caution sign” for stocks. Now, the latest Investors Intelligence (II) survey indicates that stock market bears haven’t been this AWOL since 1987 — the year of the “Black Monday” crash.
II BEARS AT LOWEST LEVEL SINCE FEBRUARY 1987
The weekly II survey showed the percentage of self-identified bullish advisors rose 2.3 percentage points last week, to 66.7% — that’s the highest level since March 1986. The average II bulls
Likewise, the percentage of self-identified bears fell by 0.8 percentage point, to just 12.7% — the lowest reading since February 1987. That’s roughly half the average bearish II reading of 25%.
BULLS-MINUS-BEARS LINE IN 99TH PERCENTILE OF ALL-TIME READINGS
Last week, the II bulls-minus-bears line topped 50% for the first time since 1987, and is now at its highest point since March 1986, at 54% — the 99th percentile of all-time readings. Since 2005, the bulls-minus-bears line has been just 22%, on average.
There have been just seven other times in history when the II bulls-minus-bears line moved above 50% for the first time in at least six months. Aside from signals in 1986 and 1987, there was a cluster of signals in the early 1970s, as well as a pair of signals in 1964-1965.
S&P RETURNS AFTER BULLS-MINUS-BEARS LINE TOPS 50%
While the average one-month post-signal return of 1.12% is higher than the S&P 500 Index’s (SPX) average anytime one-month gain of 0.6%, looking at data since 1964, the index’s longer-term returns leave much to be desired. Six months after a signal, the SPX was up 2.47%, on average, compared to an average gain of 3.9% anytime. Further, the average post-signal gain of 3.52% a year after II signals is not even half the S&P’s average anytime one-year gain of 7.89%.
Still, while the S&P 500 has generated weaker-than-usual returns after a high bulls-minus-bears reading, the January Barometer is still very much in stocks’ favor, as White recently pointed out. However, those concerned that overbought stocks are due for a breather may want to heed founder and CEO Bernie Schaeffer, who recently noted that options hedges against a correction are priced to move.