Market newsletters have been more than 50% bullish for more than a year
If you subscribe to a market newsletter, chances are it is telling you to buy, and that's been the case for over a year now. This is per the Investors Intelligence’s (II) sentiment survey, which collects over 100 stock-based newsletters and determines the percentage of them that are bullish, bearish, or expecting a correction (short-term bearish, longer-term bullish).
Per III, the percentage of bullish newsletters has been over 50% since May of 2020. While this survey has been around since the early 1960s, this is the first time bulls have been over 50% for more than a year. Below, I will dive into previous bullish streaks to see what implications this could have on the market going forward.
What Happens When the Streak Ends?
The percentage of bullish newsletters has pulled back over the past several weeks, putting this recent bullish streak at risk. The question is whether these streaks indicate pent-up selling pressure, and if they end in a sharp pullback.
To answer that question, I looked at prior instances when the percentage of bulls in the II sentiment survey was above 50% for at least 13 weeks in a row. Then, I found the specific dates when the streak ended, and summarized how the S&P 500 Index (SPX) performed going forward. The first table below shows these results, while the second table shows other weeks since 1966, which is the year of the first signal.
Looking at the average return, stocks seem to lag slightly, as the average return is lower after the streak ends as compared to other times. The percentage of positive returns, however, is not very different. Therefore, fears these streaks end in big drawdowns are unfounded. It is possible to conclude this by looking at the average loss. When the market fell after these streaks ended, it averaged a loss of 5.42% over the next six months. Other times, the SPX average loss was over 8%.
This last table shows some of these individual occurrences, sorted by the number of weeks the streak lasted. As I mentioned, this current streak is the first one that lasted at least a year, or 52 weeks. The only streak that is somewhat close is the one that ended in 2004, totaling 46 weeks. Stocks were relatively flat after that streak, with the SPX up just 1.7% after six months. The one-year return, however, was better, with the index up over 7%.
