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Investors Intelligence Sentiment Helps Bulls
Chart Spotlight
by Carl Swenlin
DecisionPoint.com
March 10, 2006
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Last week I wrote an
article entitled Rydex
Cash Flow Is Bearish in which I pointed out the
divergence between bull and sector fund cash flow, which was declining,
and price, which was rising. This divergence still exists. Historically,
such divergences result in price declines much more often than they do
not, and I asserted that it was most likely that we would see a similar
outcome from the current divergence.
Nevertheless, a divergence has developed in the Investors Intelligence Advisor Sentiment poll that I have to interpret as bullish. Note on the chart below how the percentage of bulls has dropped, the percentage of bears has increased, and the Bull/Bear Ratio is at its lowest point since the August 2004 low, which marked the end of the longest and deepest correction of the current bull market.
What is wrong with this picture? While sentiment has grown increasingly bearish over the last several weeks, prices have continued to rise. This is very unusual because prices drive sentiment, not the other way around. For example, as prices rise, people become more bullish, and vice versa. So how do I explain the divergence? I can't. This isn't supposed to be happening, but it is. Could it be that people are getting smarter and are correctly anticipating an imminent price decline? That's not the way sentiment works. Maybe it is different this time, but it is safest to interpret indicators the usual way, not try to make them fit a forecast. The bottom line is that current Investors Intelligence bearish sentiment readings are bullish for the market. Based solely upon this, I would expect prices to move higher until sentiment becomes more bullish, or at least more neutral. This is in conflict with a whole lot of other indicators (and expectations), including Rydex cash flow, but indicators are seldom unanimous. To clarify, I do not mean to imply that this sentiment reading overrides everything else, just that it makes me very nervous about being bearish. There is too much of a consensus in favor of a negative outcome, a situation that is more likely to result in a rally rather than a decline. That is not a forecast, just a heads up for those of you who are dying to be short.
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