The biggest first-quarter rally by the Standard & Poor’s 500 Index since 1998 has driven bearishness down to levels that warrant caution on U.S. stocks, according to analysts who uses charts to predict markets.
The proportion of pessimistic newsletter writers in Investors Intelligence’s latest weekly survey dropped to 15.7 percent, close to the 15.6 percent reading in December 2009 that was the lowest since April 1987. The figure fell from 23.1 percent, the biggest drop since 1993. Optimistic newsletters amounted to 57.3 percent. The ratio of bullish-to-bearish publications of 3.65-to-1 was the largest since June 2003.
“That’s a warning flag,” said Edward Yardeni, president of Yardeni Research Inc., who founded his own firm in Great Neck, New York, after working for Prudential Securities and Frankfurt-based Deutsche Bank AG. “That means a lot of investors are already in the market. The bull market is more sustainable when everyone is bearish and pessimistic.”
To some investors who view sentiment as a contrarian indicator, less pessimism suggests the S&P 500 is at risk of falling because investors may be close to running out of cash to buy more shares. The benchmark measure of U.S. equities has surged 97 percent from a 12-year low in March 2009, including a 5.4 percent gain in the first quarter, after the government introduced measures to spur economic growth and corporate earnings beat analysts’ estimate for eight straight quarters.
The S&P 500 rose 0.2 percent 1,335.54 yesterday, meaning it needs to climb 0.6 percent to surpass its 32-month high of 1,343.01 on Feb. 18.
Newsletter writers predicting a correction, or 10 percent decline in stocks, increased to 27 percent from 25.3 percent during the week ended April 5, according to Investors Intelligence, which has run the survey since the 1960s.
Investors such as John Carey at Pioneer Investments said bullish sentiment by itself isn’t a reason to sell stocks. The highest bull-bear ratio in the past two decades, 3.74, occurred in June 2003, three months into a bull market that continued for another four years.
“You’re not in a minority any longer if you’re bullish and everybody else is bullish,” said Carey, a Boston-based money manager at Pioneer, which oversees about $250 billion. “While it might be something to think about, I wouldn’t necessarily act on that. You can have a prolonged period of general bullishness just as you can have a prolonged period of general bearishness.”
Individual investors are becoming more bullish, too. The American Association of Individual Investors’ latest weekly survey showed 41.8 percent of the respondents were optimistic, up from 37.8 percent the previous week. Bears dropped to 31 percent from 35 percent.
Retail investors are returning to stocks after shunning equities in favor of bonds during most of the bull market. U.S. equity funds attracted about $12 billion of inflows since December, compared with $134 billion of redemptions during the previous six quarters, according to Investment Company Institute data compiled by Bloomberg.
The 32 percent drop in the proportion of bearish advisers marked the 16th time since 1975 that bearish sentiment experienced a weekly decline of more than 30 percent, according to Bespoke Investment Group LLC. In the previous 15 occasions, while the S&P 500 rose 0.8 percent on average in the next three months, the gain trailed the average three-month return of 2.3 percent for all periods since 1975, Bespoke data show.
“Once the public sentiment shifts so far, it means everybody is in the pool,” said Paul Hickey, co-founder of Harrison, New York-based Bespoke. “It takes time to digest those gains before the market can continue to rally.”
While the absence of bears may not spell the end to the bull market, it does add to evidence that the market is due for a pullback, said Dan Wantrobski, the Philadelphia-based director of technical research at Janney Montgomery Scott LLC.
“I don’t think we’re at a sentiment level that can induce a major top,” Wantrobski said. “It’s probably an argument for a healthy correction.”