This week, advisors reacted to last Tuesday's large market decline by running for cover, in spite of the talk of further Fed rate cuts.
The bulls moved all the way down to 36.7%, the lowest reading since June 16, 2006 when they were 35.6%. Prior to that single week, you have to go all the way back to October 2002 to find fewer bulls. That occurred at the bear market low, so the current readings are very encouraging and suggesting that there is enough pessimism out there for an important market bottom. Last week the bulls stood at 41.6%.
The bears moved up to 35.6%, from 32.6% a week ago. Just shy of the 37.4% reading shown for three consecutive weeks in August 2007. Those readings proved to be bullish.
The correction group rose to 27.7%, from the prior 25.8%. These advisors are looking for a near term drop in stocks, but they expect it will be a buying opportunity. These are potential bears as opinion shifts often occur in stages and some advisors shift from bullish to correction before turning bearish.
Much of the advisor pessimism was due to the very weak January market action and follow through last week. In addition, they increasingly mention that the economy is probably in a recession, echoing the commentators from the financial press. They also note the continuing sub prime mess.
In additional to the bullish advisory sentiment we have also been seeing excellent insider activity, with the best buying since 1982. Interest rates are in a definite 'down' cycle and many medium-long term indicators show their initial upmoves after declines to bear market low levels.
The difference between the bulls and bears is now just 1.1%, down from 9.0% a week ago. It shows a clear bullish level that was last achieved in June 2006. It shows a major contraction from the very negative 42.4% spread that occurred with the early October 2007 market high.
A bull-bear difference that narrows to around 15% (or less) and then expands provides a buy signal. That was the late August 2007 signal, the spread was a very bullish 3.2%, and before that on 14-March-2007 [16%], and in June 2006 [0% difference].
Sentiment Chart (By Matt Frailey)
The ratio of the Nasdaq/SPX is in a bull wedge; this implies that the Nasdaq and techs will start to outperform; this would be bullish for the market as well.
