What do you get when you cross an overbought market with too few bears? Often, that combination of complacency leads to a correction. So far, all it has produced is a lot of frustrated contrarian traders.

Stephen Suttmeier, technical strategist at Merrill Lynch, put the situation into broader context in his monthly chart book over the weekend:

As of October 25, Investors Intelligence (II) % Bears extended deeper into contrarian bearish territory below the 20% level with a reading of 16.5% … down from 18.5% the prior week and the lowest level for II % Bears since April 2011 – this suggests too few bears among newsletter writers … However, given the strong trend for the equity market as well as bullish volume (VIM & VIGOR), market breadth, weekly momentum and seasonals, we favor a rally into year end and expect pullbacks to be limited.

I spoke with Merrill’s MacNeil Curry this morning. He noted that while there may be too few bears, sentiment is but one factor in the overall market equation. The other elements are fairly positive: We are now in the seasonally best half of the year, market trend has been strong, and the momentum and volume have been constructive. Most notably, market breadth — the number of stocks advancing relative to the decliners — is very positive.

Merrill’s technical team is looking to take advantage of any pullback. Today’s red screens just might be the start of that correction. They expect it to be relatively shallow, and would suggest adding to equities to be positioned for an expected year end rally.


Orginally published here

Category: Sentiment, Technical Analysis

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5 Responses to “Does Too Few Bears = Correction?”

  1. 4whatitsworth says:

    I would not say that I am a bear but I am ready to hit the sell 20% button on the first big stinky pile of B.S. I see. The first drop could be the Taper with no inflation.

    • Angryman1 says:

      Taper shaper. Who cares.

      The market hasn’t moved in 6 months. It has been dead flat. The pros got back in because they are optimistic and that process is over.

      Typical recovery when adjusted for inflation. We are still below the 2000 peak.

  2. Doug of North Texas says:

    Interesting, though. Yardini’s sentiment indicators presentation had red lines around the Investor Intelligence ratio of greater than 3X bulls than bears, which did show better correlation with a correction. I have watched II’s index of bears bounce around 18-20 for many months, but the bull part was generally under 50; now we have a 51-52 vs. 16.5 – that would satisfy Yardini’s criteria (Sept 19 or so, 2013).

    Let’s see if it works this time or we have to be even more patient. See also RYDEX money market funds (low amount of money left to invest – can’t remember who pointed that out, probably Tom McClellan). But even with all of this, the bear has not yet appeared on stage.

  3. mpetrosian says:

    I’m running my portfolio following an analyst/insider algorithm using open market purchases SEC Form 4 information that shows this market about to breakout into new record territory! Just kidding! But I did get that call from a referral today. Scary stuff. I’m a bear. I hate that I am but that’s just how I feel. My portfolio is a diversified basket of low cost holdings rebalanced on a regular basis that ignores me and thinks I’m an idiot.