Click to enlarge

 

Terrific timely discussion chart from Mary Ann Bartels & Co. at MER showing the extent of bearish anticipation of a correction:

Investors Intelligence (II) sentiment data shows 34% of newsletter writers are expecting a correction. The prior two corrections occurred with this level at 34.7% and 35.1% respectively.

Bartels adds that “newsletter writers need to capitulate and remove their calls for a market correction in order to get a contrarian bearish sentiment extreme.”

When too many investors are looking for a correction, it reflects that selling has already occurred. That implies less supply, less downside pressure, and the potential for pros to be forced back in. It is the Long-only side version of a short squeeze.

 

Source:
The 6th best cyclical S&P 500 bull market still steady,
Stephen Suttmeier, Mary Ann Bartels, and Jue Xiong
Merrill Lynch, March 25 2013

Category: Sentiment, Technical Analysis, Think Tank

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.

20 Responses to “Too Many Expecting a Correction”

  1. ben22 says:

    good stuff…great chart

  2. [...] Everybody and their brother is expecting a correction.  (Big Picture) [...]

  3. [...] Ritholtz points out that Bearish skepticism may be an overcrowded trade at the moment, despite (and perhaps because of) the recent run-up in [...]

  4. James Cameron says:

    It would be interesting to have the S&P laid over this chart to get some sense of how strong the correlation is. From July 21 thru Aug 8 of 2011 the S&P lost approx. 17% of its value, with bearish sentiment appearing to peak a month or two earlier (difficult to tell without finer granularity).

  5. Gonzop says:

    Barry,

    Is it me or you are posting mainly bullish content on your website those last weeks? [BR: Its you] It would be sad if you, of all persons, being one of the most respected financial bloggers of all time, had contributed to the late distribution on US equities. Namely, the smart money has now long sold this rally, leaving only Mila Kunis all her friends and relatives to jump in because they read the wrong things at the wrong time.

    I do not want my post to sound partisan or negative. So my contribution to your website will be this: European markets have long turned south, German DAX index is now leading the downside, and this has been, since 2007, something to respect. It is not a matter of if, but when, that US equities will follow so YES, everyone should expect a correction from those levels, and i find it terribly wrong and dangerous to want to support current rally in such a late stage.

    About sentiment now. Those sentiment measures are so many, one may pick the one that fits one’s view. One could produce 5 other sentiment indicators showing record complacency on US equities etc etc. I find such post not worthy of a ‘top 10′ financial blog, either way.

    I hope my comment help. Personally, as long as smart money stuffs the greedy gullible ones at market tops, or steals from them when they are scared at bottoms, as long as they do this, and this pattern is identifiable and repeated, we can make money by following the right camp. And the right camp is selling now. Next thing you need to know is your timeframe, but that is another topic. Happy and cautious trading to everyone!

    ~~~

    BR: Its you:

    Discuss: Is Anything Cheap?
    Do Record Equity Inflows Mean Anything?
    Romancing Alpha (α), Breaking Up with Beta (β)
    How Cheap Are Equities ?

    As to time frames, we addressed that earlier this month here and here.

  6. Liquidity Trader says:

    Gonzop

    Let me guess, your carrying way too much cash, and are frustrated by the continued rally . . . ?

  7. dina says:

    Gonzop: we can make money by following the right camp
    ~~~~~
    How do you follow the right camp?

  8. James Cameron says:

    > European markets have long turned south, German DAX index is now leading the downside

    The DAX and S&P have virtually tracked each other since the 2009 bottom:

    *In March 2009 the DAX bottomed at 3666
    *In Sept of 2011, after another major sell-off, it was at 5190
    *It now sits at 7871, near an all time (nominal) high

    Leading the downside?

    I think you have to take what these markets will give . . . on any given day or week there’s an awful lot of noise including dire predictions . . . and yet they’ve doubled since 2009.

  9. Disinfectant says:

    The data cited regarding the past two corrections occurring at 35% completely contradicts the claim that there will not be a correction right now at 34%. Very poor and backward analysis when your own data shows the opposite of your claim.

  10. lefty gomez says:

    Shortly after getting my first real post-college job, I purchased a special mutual-funds issue of Money because I intended to open my first IRA. I remember the cover of a large, exhausted bull, suggesting that the then-current bull market had run its course. The year was 1993. That bull market still had 6 years to run and even post-correction 2000 index prices beat 1993 prices. These things are very hard to time.

    Something about the market staying irrational and you staying liquid….

  11. Angryman1 says:

    Steady Inflation, economic growth are always good for equities, especially if the output gap is closing some.

  12. Frilton Miedman says:

    I watch the AAII weekly sentiment, only as one of a number of tools, rule of thumb appears to be 40%+ bullish before a pullback, this week it’s @ 39, I’d guess we’re due for a correction within a week, maybe two, but no idea how big.

    I’d wager TBTF prop desks have access to this info in real time, it’s already known that HFT’s have real time access to specific traders transactions, enabling them to track and store large amounts of specific trading strategies to gauge long/short positions.

    As for newsletters, Mark Hulbert has that cornered, but judging by BR’s uncanny timing calls in recent years, looks like he does something similar.

  13. lo574 says:

    With the Fed representing 60% of the market and buybacks another good portion, I doubt sentiment surveys mean as much right now *unless* we see an increase in fear. All eyes on the EU once again as U.S. econ continues to improve; albeit slowly.

  14. dhukka says:

    Sorry I’m having trouble understanding the analysis. I’m sure it is something simple I’m missing. The graph indicates that when a high level (over 32%) of newsletter writers anticipate a correction, it serves as a contrary (bullish) indicator. However the last two corrections occurred when the percentage of newsletter writers expecting a correction was even higher than it is now. How about overlaying the S&P500 with the sentiment chart so we can see how accurate it is?

  15. ukarlewitz says:

    Green lines are >5% corrections laid against that chart. With all due respect, I struggle to find a convincing pattern.
    http://screencast.com/t/56Dlt6t6

  16. boveri says:

    Am I missing something or have these newsletters been correct in calling the past two corrections? – “34% of newsletter writers are expecting a correction. The prior two corrections occurred with this level at 34.7% and 35.1% respectively.”

  17. [...] I mentioned that 2 things that led to the chart above: 1) Too many people are looking for a correction for one to occur; 2) Bearish sentiment rises after selling has already [...]

  18. [...] Everybody and their brother is expecting a correction.  (Big Picture) [...]