Bearish Sentiment Overtakes Bulls; A Contrarian Buy Signal?

There has been a momentous shift in sentiment among the investment newsletter class. For the first time in nearly two and a half years, the Investors Intelligence (II) survey shows more newsletters are bearish on stocks than bullish. II has data going back to the 1970s and tracks over 100 independent newsletters, categorizing them as bullish, bearish, or short-term bearish but longer-term bullish. With decades of historical data, the survey provides valuable insight into how investment professionals perceive the market. This week, I’m examining what these sentiment shifts have meant for stocks going forward.

Bears Overtake Bulls

The chart below shows the collapse of bullish sentiment relative to bearish sentiment in the II poll. The last time the bulls-minus-bears line was below 0%, indicating more bearish newsletters than bullish, was late 2022. Looking at the chart, it appears that when most newsletters are bearish, the market is at or near a buying opportunity.

To back this up with data, I examined past instances where the bulls-minus-bears reading dropped below 0% for the first time in at least six months. Since the early 1970s, this has occurred 24 times. The table below summarizes the S&P 500 Index’s (SPX) performance following these signals.

The results confirm what the chart suggests. The SPX has averaged a gain of almost 12% over the next six months after these signals, with 83% of those returns positive. For comparison, the typical six-month return for the index has been 4.54%, with 70% of returns positive. In every timeframe, from one month to one year, the SPX has outperformed its typical historical returns after the II survey shows more bears than bulls.

Another way to look at the data reinforces the idea that the II poll is a contrarian buy signal. When the bulls-minus-bears reading has been negative, as it is now, the SPX has averaged a 14% gain over the next year. When bullish sentiment moderately outpaces bearish sentiment, the index has averaged an 8.5% gain. When newsletters are overwhelmingly bullish, the index has averaged just a 7.35% return over the next year. The S&P 500 has consistently outperformed across all timeframes when the II survey reflects more bearish than bullish sentiment. If history repeats, this trend suggests a buying opportunity in the current market.