Despite U.S. stocks enjoying their best week in years last week — and sending up a rare stock market signal — optimism waned for the third week in a row. Specifically, the number of self-identified bulls in the Investors Intelligence (II) survey fell again last week, dropping below 50% for the first time since September. Below, we take a look at how the S&P 500 Index (SPX) tends to perform after three straight weeks of declining optimism.
The number of II bulls dropped 3.4 percentage points to 48.5% last week — the lowest since the August 2017 pullback. Self-identified bears edged up 0.2 percentage point to 14.6%, while advisors expecting a correction crept 3.2 percentage points higher to 36.9% — the highest in more than a year. The bulls-minus-bears line is now at 33.9%, marking its lowest point since mid-September.
The last time the percentage of II bulls fell for three straight weeks — what we’ll call a “signal” — was roughly six months ago. Prior to that, you’d have to go back to May 2017. Below are the last 10 instances, along with the S&P’s subsequent returns. As you can see, the index was comfortably higher a month after the last four signals. Likewise, the SPX rallied in the three months following the last four signals, averaging a gain of 4.8%.
Looking at SPX returns after the last 31 signals (since 2010) also shows some short-term outperformance. The broad-market barometer was higher by 0.74%, on average, one week after signals, and in the black more than 61% of the time, according to data from Schaeffer’s Senior Quantitative Analyst Rocky White. That’s more than triple the S&P’s average anytime one-week gain of just 0.23%, with a win rate of under 60%, looking at data since 2010.
In conclusion, if past is prologue, the S&P could extend its recent upward momentum in the next week, as former bulls jump back in from the sidelines. And considering the index’s recent three-month returns after three straight drops in Investors Intelligence bulls, the stock market could continue to warm up this spring.