By: Chris Rowe — July 3, 2019
This Market Has PLENTY of Room to Run
With the major market averages at or near new all-time highs, many investors may be starting to feel a "fear of heights". They might think the market is nearing the top, and that they should think twice before buying.
As you're about to see, that would be a huge mistake. And it could cause you to miss the best buying opportunity you're likely to see for a long time.
Because this bull market has room to run. In fact, one key indicator is saying there's still plenty of meat left on the bone.
People are doubting he market, which is EXACTLY what this indicator lets us see. By using this indicator, we can tell that this s not yet a "crowded trade". Savvy investors are still positioning themselves.
Let's take a look at this indicator, called the Investors Intelligence Advisor's Sentiment Index.
Sentiment indicators are psychological indicators that measure the level of bullishness or bearishness in the stock market.
Investor's Intelligence reports the sentiment of over 100 independent advisors in its network -- asking them whether they're bullish, bearish or expecting a correction (where they'd buy).
The Sentiment Index is a contrary indicator, meaning it indicates we are at or near a top when too many people feel we are NOT at or near a top.
Not only is this an excellent indicator, but watching it is an awesome exercise for your overall trading habits. This is because it trains you to feel more comfortable about doing the opposite of what the crowd is doing.
Bullish advisor readings above 60% are rarely seen, but when they are... that’s extremely bearish. Readings above 55% means it's time to start paying attention, and to look out for a possible market top. But a 60% level is the true red flag.
(Investors Intelligence considers the norm to be 45% bulls, 35% bears, and 20% neutral.)
(Click any image to enlarge)
Right now the reading is at 55.2%. This reading is far from the kind of elevated levels this indicator can reach. In fact, It's pretty low considering the high levels of bullishness we’ve seen in recent history.
And this is especially true after coming out of such washed out oversold territory like what we saw in December. Consider what happened in 2016, the last time the market was so washed out.
In early February 2016, the market put in a bottom, and then climbed 29% in a year and 35% in about 18 months.
And it didn't stop. Even after bullish advisor sentiment spiked past 60%, the market gunned higher. It only topped out in September/October 2018, when it hit 2,930.75 -- 58% higher than the 2016 low.
Take a look.
The red arrow on the left shows November 2017, when bullish sentiment hit 60% and beyond.
The green dashed line shows sentiment at around 55%, which is where we are today.
The Advisor's Sentiment Index has an excellent track record as a contrary indicator. But (like every other technical indicator) should be used in conjunction with other indicators.
When it reaches extreme levels, you should stop and look around. The idea is that advisors are wrong when too many of them think the same thing.
Usually when this is occurring, investors are acting on emotion rather than logic and these extremes of fear or greed are usually followed by market reversals.
Happy Fourth of July.