Latest Investors Intelligence Survey Triggers Intermediate-term Bullish Setups

The NASDAQ/NYSE Volume Ratio closed at a high 1.75 Thursday. This continues
the trend of elevated speculative participation that’s been in effect since
the beginning of May. Note that this is only the fourth time in history that
the 20-day moving average of the volume ratio has held above 1.50 for such an
extended period (see long-term chart). Other instances were October 2007,
November 1999 and May 1996, all of which ultimately led to a lower Nasdaq by
the time the 20-day average fell back into average territory.

While the S&P rebounded in Thursday’s afternoon session to close slightly
higher, it’s noteworthy that the morning selloff sent the S&P just below last
week’s lows, nullifying the potential for an ‘inside down week’ (see my May
7th column).

There hasn’t been much in terms of positive news for the stock market
recently, but this is a start… The latest Investor Intelligence survey
reveals a sharp reversal in sentiment among newsletter writers. The bullish
percentage fell to 36.3% from 43% the prior week, while the bearish percentage
jumped to 37.4% from 32.6% the prior week. For only the second time in the
last five years, that triggers what we refer to as a ‘cross’, as the bearish
consensus has crossed over the bullish consensus. Historically, newsletter
writers are a bullish crowd (see long-term chart), and it’s unusual to see
more bears than bulls on any given week. When this does occur, it’s a sign of
extreme pessimism, which often means selling pressure is at or near an
intermediate-term exhaustion point. The result has typically been a higher
S&P500 three weeks later. Since 1990, there have been 21 separate crosses, all
of which are noted in the table below along with the performance of the S&P
over the next three weeks….

Investors Intelligence Bears Outnumber Bulls
06/20/08 Cross…S&P ??? three weeks later
03/14/08 Cross…S&P +6.4% three weeks later
10/11/02 Cross…S&P +7.9% three weeks later
08/09/02 Cross…S&P +0.8% three weeks later
07/19/02 Cross…S&P +7.3% three weeks later
09/21/01 Cross…S&P +13.0% three weeks later
09/25/98 Cross…S&P +1.1% three weeks later
09/04/98 Cross…S&P +7.3% three weeks later
08/29/97 Cross…S&P +5.7% three weeks later
04/11/97 Cross…S&P +10.2% three weeks later
08/02/96 Cross…S&P +0.7% three weeks later
11/03/95 Cross…S&P +1.6% three weeks later
04/15/94 Cross…S&P +0.4% three weeks later
02/18/94 Cross…S&P -0.3% three weeks later
11/05/93 Cross…S&P +0.8% three weeks later
05/21/93 Cross…S&P +0.3% three weeks later
10/09/92 Cross…S&P +4.0% three weeks later
12/27/91 Cross…S&P +3.1% three weeks later
11/29/91 Cross…S&P +3.2% three weeks later
08/10/90 Cross…S&P -3.9% three weeks later
04/27/90 Cross…S&P +7.8% three weeks later
01/26/90 Cross…S&P +2.1% three weeks later

From a longer-term perspective, a bullish consensus reading under 40% has
typically had bullish implications looking out three months. The table below
highlights the last thirty separate instances in which the Bullish Consensus
initially fell below 40%, along with the S&P’s performance over the next
twelve weeks. To prevent overlap, any signal triggered while an existing
signal remains in effect has been ignored. Note that in 25 out of 30 cases, or
83% of the time, the S&P was trading at a higher level three months later…

Investors Intelligence Bulls Drop Below 40%
06/30/89… S&P +9.1% twelve weeks later
09/29/89… S&P -0.5% twelve weeks later
01/26/90… S&P +2.9% twelve weeks later
04/27/90… S&P +9.9% twelve weeks later
08/10/90… S&P -7.1% twelve weeks later (*)
11/16/90… S&P +13.3% twelve weeks later
05/31/91… S&P +1.1% twelve weeks later
10/18/91… S&P +5.8% twelve weeks later
04/10/92… S&P +1.9% twelve weeks later
09/18/92… S&P +2.6% twelve weeks later
05/07/93… S&P +1.3% twelve weeks later
07/30/93… S&P +3.4% twelve weeks later
10/29/93… S&P +1.5% twelve weeks later
01/21/94… S&P -6.0% twelve weeks later (*)
04/15/94… S&P +0.8% twelve weeks later
02/10/95… S&P +8.0% twelve weeks later
05/26/95… S&P +6.8% twelve weeks later
10/27/95… S&P +5.5% twelve weeks later
04/26/96… S&P -2.3% twelve weeks later (*)
04/04/97… S&P +17.1% twelve weeks later
08/22/97… S&P +0.5% twelve weeks later
09/11/98… S&P +16.6% twelve weeks later
10/15/99… S&P +15.6% twelve weeks later
09/21/01… S&P +16.3% twelve weeks later
07/12/02… S&P -13.1% twelve weeks later (*)
10/04/02… S&P +9.4% twelve weeks later
03/14/03… S&P +18.5% twelve weeks later
08/27/04… S&P +5.7% twelve weeks later
06/16/06… S&P +3.8% twelve weeks later
02/15/08… S&P +2.8% twelve weeks later
05/30/08… S&P -4.1% (open – ends 8/21)

Categories : Archived EOD Commentary, End-of-Day Commentary

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