Yesterday in the office, we were discussing when to take a little something off of the table. This upthrust has been very strong (itself a positive), but we tend to be wary when rallies are seemingly built on rumors. The 19th trial balloon of some new ECB intervention should not trump slowing fundamentals and peaking earnings.

With many of our holdings at multi-year highs, is this where we sell a bit of the long exposure? The key to running an asset allocation model is not so much what to do, as when. Is now the ideal time to sell?

I have called this move off of the March 2009 lows “the most hated rally in history.” The discontent of underinvested fund managers has been a positive. Indeed, the Bill Gross comments on the end of the cult of equities yesterday was itself bullish (I’ll have more to say on Gross later this week).

But its not just the Pimco boss; according to Merrill Lynch’s quant group, Wall Street’s “sell side strategists are now more bearish on equities than they were at any point in the last 27 years.” And we know as a whole, this group tends to get it wrong at key inflection points.

After the Fed liquidity fountain, this is perhaps the single most bullish thing I can think of. The difference being the Fed juicing is an artificial external input into markets; excess bearishness is pure behavioral finance at work.


Sell Side Consensus Contrary Indicator 
click for larger chart



Equity sentiment hits a record low
Savita Subramanian
Equity and Quant Strategy
BofA Merrill Lynch 01 August 2012

Category: Contrary Indicators, Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “Strategists Most Bearish on Equities since 1985”

  1. whodunit says:

    The sound of crickets is rather loud. Hold on to that long exposure.

    Imagine the pressure if they juice this some more. Oh the pain !!!

  2. DrungoHazewood says:

    Gross and stocks don’t mix since at least ’09. We need Tony Robbins if we want to be 100% sure. Or me.

  3. CSF says:

    I didn’t read Gross’s piece as a market timing or valuation call. He’s not advising that we go to cash. He simply makes the case that over the long, long run we should lower our expectations concerning returns on equities (and bonds), and we should explore ways to protect ourselves from inflation. This seems prudent. If he’s wrong – if new sources of productivity lead to greater than expected economic growth and returns to shareholders – we will have a pleasant surprise.

  4. [...] Strategists haven't been this bearish on stocks since 1985.  (TBP) [...]

  5. Petey Wheatstraw says:

    Is the blood in the street, or lack thereof, real or a matter of perception?

    The 24 hr. news cycle has mad it difficult to distinguish rumor from news.

    Here’s an alternative method of divining the markets:

    To infinity, and beyond!


  6. Petey Wheatstraw says:

    Good morning BR. I seem to be stuck in comment jail. Could you possibly bail me out?


  7. george lomost says:

    These ‘behavioral finance’ assumptions are getting out of hand. Everything is a contrarian indicator except when it is not. So the idea that the Fed’s ‘liquidity fountain’ guarantees elevated prices of equities for the forseeable future is bullish but worries that the Fed’s liquidity gums up the works is a contrarian indicator.

    I could make a rather long list of bullish assumptions that nobody interprets as contrarian indicators (the ‘cloud’, enough corporate cash of bail out Greece, Spain, Italy and still have money left over, ‘monetization’ of social media, …).

  8. dead hobo says:

    But they know you know, thus it won’t work.

    But since they know you know they know, it might work.

    Then again, since they know you know they know you know, so you’re screwed.

    But these are smart people. Therefore, since they know you know they know you know they know then you might be lucky if you decide or not.

    Fortunately, nobody gives a shit about China or Europe, so all you need is to listen to the negativity of good old U.S. of A certified pundits. Then do the opposite, but only if they’re negative. Otherwise, do what they say because you will win big.

    Got It!

  9. Dima says:

    Ah speculation – America’s national pass time. What’s the word? Who has the tip? When E.F. Hutton talks…….

  10. bl5150 says:

    If memory serves correct the recent plunge in that index was due to the addition (for the first time) of a big bank (UBS or similar) who were saying 0% equity allocation. So the index has been distorted and is not consistent with the past data.


    BR: I believe this Merrill proprietary indicator would not be that effected by a single bank swing:

    “The Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month. We have found that Wall Street’s consensus equity allocation has historically been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa. See our November report for more details on the Sell Side Indicator.”

  11. dead hobo says:

    Dima Says:
    August 1st, 2012 at 8:39 am

    Ah speculation – America’s national pass time. What’s the word? Who has the tip? When E.F. Hutton talks…….

    No. This isn’t speculation. This is long term technical analysis. The longer the better. Shit that happened in 1909 still reverberates as an influential cycle component. If you understand the frequency, you have the keys to the treasury. All you have to do is believe. Also, it helps a lot to ignore every time it didn’t work.

  12. [...] writes Barry Ritholz, citing the extreme negative sentiment in the chart below on professional investor sentiment from [...]

  13. gloeschi says:

    Behavioral finance works only to a certain point. Most gauges pointed towards very bearish investor sentiment in summer 2008, yet the market lost 50%. Sentiment among institutional investors matters little, since they are often stuck in their style box and prohibited via by-laws of having more than 5% cash. Even if they were bearish, the only thing they could do was to try to move into more defensive stocks within their style box. This is what you usually observe before the beginning of a bear market: defensive stocks become more expensive. In the subsequent fall defensive stocks sometimes fall as much as the market since the P/E deflates more than the P/E of cyclical stocks (whose P/E had correctly anticipated the slowdown, making this group of stocks look cheap). The market as a whole cannot be bearish or bullish – someone has to own the stocks.

  14. Dima says:

    dead hobo says:

    No. This isn’t speculation. This is long term technical analysis. The longer the better. Shit that happened in 1909 still reverberates as an influential cycle component. If you understand the frequency, you have the keys to the treasury. All you have to do is believe. Also, it helps a lot to ignore every time it didn’t work.

    Very sharp – thanks – your wit is challenging and multi level – keep it up!

    “In most periods the investor must recognize the existence of a speculative factor in his common stock holdings………More than that, some speculation is necessary and unavoidable, for in many common stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone.” – Benjamin Graham

  15. [...] Strategists more bearish on equities since 1985. Also, we look forward to hearing Barry’s commentary on Bill Gross, which will appear later this week (TBP)  [...]

  16. Robert M says:

    I remember being on the floor on expiration day Oct ’87 and covering all of our shorts into the bell. Then the runoff came. I was instantly net long because some of the covering was against short call options. Two days later came the buy. I believe that is what the chart is telling you. You just haven’t seen the runoff.

  17. nofoulsontheplayground says:

    BR, I think one thing that is missing here is the ability to compare apples to apples. To get a real bead on this indicator I believe you really need data from 1966-1982, the last secular bear market. Levels that trigger contrarian entry points on the sell side indicator may be different in a secular bear market.

    Also bothersome is the fact that your chart indicates a H&S top breakdown that targets 31%. It also looks like a waterfall drop, which is like trying to catch a falling knife. On the plus side, the series of drops since 2000 appear to gradually increase (10 points, 14-points, and now 17-points), and we’re near an area where the series may pause and reverse. This is a highly speculative presumption, however.

    Take a look at industrial metals. They are not liking the current economic backdrop at all.

  18. denim says:

    So a peek at both bond and prefered stock CEF’s shows upside activity. Price appreciation and dividends. I am in a CEF of prefered stocks, but only a tiny position…very tiny, because cash is usually king during the long hot summer days. And, of course, the pundits are busy talking the market down as much as possible. Like disaster worse than 2008.

  19. Disinfectant says:

    I’m a big fan of using sentiment as a contrary indicator. The problem I have with it right now is that market prices do not fit with the sentiment story. Normally when sentiment readings are pessimistic, the market has dropped a large amount already. That is not the case at all with U.S. equities today. Also, the sentiment readings are not widespread. For example, the NAAIM survey shows that investment managers are actually pretty bullish, with equity exposure much closer to what has occurred at market tops in the past couple years, not bottoms (

    Today feels a bit like it did in May of last year. Here’s an example where one of those Wall Street market strategists claimed that investors were too pessimistic on May 26, 2011 (, citing AAII sentiment surveys. The S&P 500 had only fallen -3.3% from it’s high, so I was very skeptical that investors were really pessimistic. The S&P 500 would go on to fall another 18.9% before bottoming on the morning of October 4 on fears that a Euro breakup was imminent. THAT is when I knew that investors were truly pessimistic because prices were then consistent with the outlook.

    Bottom line, I remain unconvinced that many investors are actually playing for a market drop here. If there’s a rally, I’ll let someone else have it and play the odds for a likely move lower later on.

  20. kek says:

    “Take a look at industrial metals. They are not liking the current economic backdrop at all.”

    Do you think that industrial metals have traded based on end user demand over the past decade or so? At the margin, perhaps financial demand has been the driver of metals prices. It appears that financial demand is not there anymore, and that is a good thing in total, not so good for those people that want “exposure” in their portfolio at any cost.

  21. Clem Stone says:

    That chart doesn’t pass the smell test. I don’t doubt there are higher than average levels of bearishness but that extreme stinks of fishy methodology to me.

  22. I hope folks understand this is historical data measured in years — its not a day trading or swing trading indicator

  23. gman says:

    “Take a look at industrial metals. They are not liking the current economic backdrop at all.”

    Secular equity bull markets are almost always secular bears for commodities. I’m not saying that is the phase we are entering but industrial metals will lead until they don’t.

  24. [...] The most bullish thing for the stock market: bearish sentiment.  (Big Picture) [...]

  25. [...] It’s manifest in sentiment.  As aforementioned, investors’ “professed anxiety” is high.  In fact, bearishness is at alltime highs according to Merrill Lynch: [...]

  26. [...] Strategists Most Bearish on Equities since 1985 [...]

  27. [...] Equity sentiment hits a record low | Merrill Lynch Sell Side Consensus Contrary Indicator shows that 43.9% of strategists are bullish on equities–the lowest alltime reading. [#Despondency] [...]

  28. [...] Consensus Contrary Indicator” that shows 43.9% of strategists are bullish on equities–the lowest alltime reading.  It’s a contrarian indicator that’s flashing signs of [...]

  29. [...] the argument that much of Wall Street is underinvested, consider the chart above. (We showed this last month as well). It not only asset managers, but analysts as well who are not all that enamored with [...]