Lesson #3: Bullish-Bearish Sentiment

Another Contrarian indicator I like to look at is the Bullish-Bearish Sentiment.  When Bulls get to optimistic and Bears get to pessimistic a wide divergence develops between the two which could signal a nearing top followed by a sell off.  Meanwhile when the Bears get overly pessimistic and the Bulls become less optimistic this allows for the two to converge signaling a potential bottom may be nearing followed by a significant rally to the upside.  The chart below shows the Bullish-Bearish Sentiment versus the S&P 500 Index.

As you can see over the past several years when the % of Bullish Investment Advisors (red line) has been equal to or less than the % of Bearish Investment Advisors (blue line) generally the S&P 500 has made a bottom and reversed strongly to the upside (points A, B, C, D, E, F and G).

Meanwhile when the % of Bullish Investment Advisors has been considerably greater than the % of Bearish Investment Advisors then this has generally led to a nearing top followed by a sell off (points H, I, J, K, L, M, N and O).

The next indicator we will look at is the Volatility Index (VIX). Please click on the link below to see this indicator.

 
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