Is pessimism about the stock market really as high as equity bulls claim?
One measure of the stock market’s mood is the Investor’s Intelligence Sentiment Index, which offers us a compact view of how market participants feel toward stocks.
The latest II data shows that bearish sentiment or pessimism toward stocks (NYSEARCA:IVV) has now hit 20-year lows, near 13.3. While this is just one data point, it coincides with a lack of volatility and the S&P 500 Volatility Index (ChicagoOptions:^VIX) which is also near multi-year lows.
Stretching back even further, current sentiment readings have matched Feb. 1987 lows in bearishness toward stocks.
Looking back, that served as a great setup and warning sign for anybody who bothered to pay attention. Just eight months later, the Dow Jones Industrial Average (NYSEARCA:DIA) suffered its largest one day percentage decline of -22.61% on Oct. 19, 1987.
Current sentiment readings do suggest a very high level of optimism toward stocks. How long will it last?
Sentiment extremes (NYSEARCA:VXX) can persist for extended time frames, but they never persist indefinitely.
History teaches us that sentiment extremes, regardless of whether they’re bullish (NYSEARCA:SPXL) or bearish (NYSEARCA:SPXS), invariably point to major turning points in financial markets.
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