Low Level Of Bullishness Means Equity Market Market Bottom Maybe Near

Investor sentiment continues a trend of turning less bullish. Today's Sentiment Survey report from the American Association of Individual Investors noted individual investor bullish sentiment decline 9.8 percentage points to 25.3%. Neutral sentiment declined 1.3 percentage points with the result that bearish sentiment rose 11.2 percentage points. The net result is the bull/bear spread of -21.8 pp is the widest since the spread reached 29 pp in February 2016.

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Also indicating a high level of fear is the CNN Money Fear & Greed Index. This index is in the 'extreme fear' zone as seen below.

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The fear and greed index is comprised of the seven indicators listed below.

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Below is an updated table of market and sentiment data that I originally prepared in September of 2017. At the bottom of the table is sentiment data and much of it is strongly bearish, which, from a contrarian standpoint, would be bullish for stocks. Also notable is the fact the market valuation or P/E has become more attractive even with the S&P 500 Index up 8.6% since June of 2017. Additionally, the equity risk premium has increased to 5.83%. The ERP is the expected return on stocks in excess of the risk-free rate, or real 10-year U.S. Treasury yield.

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In summary, sentiment continues to trend more bearish and is at levels that historically have signaled equity market bottoms. From a technical perspective though the price action of the market is undeniably negative. For example, in the S&P 500 Index, 41% of the stocks are down over 20% from their most recent 52-week high and another 31% are down between 10-20% from their 52-week high. Overall from a price action perspective then, for the S&P 500 Index, more than 70% of stocks are down more than 10% from their 52-week high.

This seems like a high level of downside volatility. However, as noted by Dave Wilson of Bloomberg, "The gap between the S&P 500 Index’s Sept. 20 high and Feb. 8 low is 13.6 percent, according to data compiled by Bloomberg. There hasn’t been a narrower range for a full year since 2005 when the spread was 11.9 percent".

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