Short interest and the latest II poll underscore the extreme market skepticism
There's no denying that it's been a
wild, rocky start to 2016. Despite some encouraging fits and starts, stocks have been
blazing a trail to the downside, taking cues from crude oil. Against this backdrop, two sentiment signals were sent up for the first time since 2009.
To start, total short interest on S&P 500 Index (SPX) components just hit 8.333 billion shares in the last reporting period, topping the October 2015 peak of 8.317 billion. The last time we saw short interest this elevated was August 2009, according to Schaeffer's Senior Quantitative Analyst Rocky White.
Meanwhile,
Investors Intelligence (II) releases a weekly poll of newsletters and advisors, in an effort to gauge the percentage that are bullish, bearish, or expecting a correction. In the latest poll, the percentage of self-identified bulls dropped to 24.7%, well below the average of 47% (going back to 2005). The number of bears rose to 39.2%, and the number expecting a correction rose to 36.1% -- both well above their averages over the past decade.
Notably, the correction camp is now
more crowded than in March 2009 (27.3%), White said. What's more, the bears now outnumber the bulls (bulls-bears line) by an extreme 14.5% -- the lowest reading since March 2009, and in the 10th percentile of all readings on record.
In the 156 previous instances with a bulls-bears line between 10% and 20%, the S&P has generated slimmer-than-usual returns over the subsequent two weeks. Going out four and eight weeks, though, the SPX has averaged returns of 0.9% and 1.8% -- better than the anytime averages since 1972.
In conclusion, the last time sentiment was this extremely bearish, the market was on the cusp of a long-term rally. In fact, when II bears outnumber bulls early on, the
S&P tends to do better for the rest of the year, as White recently noted. As contrarians, we believe that pessimism can equal buying power on the sidelines. If stocks take a turn for the better, a reinvigorated appetite for risk could translate into upside.