This is a wonderful little chart courtesy of Charlie Bilello, CMT:
Investors Intelligence bulls are at the lowest percentage since December 2008. The knee-jerk reaction from this extreme investor pessimism is that it must be a contrarian signal that it’s time to get bullish on stocks. However, a slightly more nuanced analysis is in order:
- The last time sentiment was this poor was December 2008. December 2008 was a great time to buy stocks for those with longer time frames, however, there was still a ~25% drawdown waiting for investors over the next couple of months (before stocks bottomed on March 6th, 2009)
- The fact that sentiment is so poor while the S&P 500 sits less than 10% from its all-time high is interesting in itself. In December 2008 equities had fallen precipitously over the prior months and the S&P sat nearly 50% below the all-time high it had made just over a year before
- The extreme bearish sentiment is a factor of the damage which has taken place in various sectors (energy, materials, mining etc.) and emerging markets
- The sharp decline in sentiment we have witnessed during the last couple of months is unprecedented, such a sharp decline didn’t even occur in 2008
This time really is different. While the broad US equity indices are barely in correction territory, many sectors and country ETFs are deep into corrections and some are even in crash territory. There is certainly a lot of healing to be done across global markets. If I had to bet we are in for a prolonged period of volatility (months not weeks), however, stocks don’t crash when the crowd is already bearish.