bearish sentiment 8, Bearish Sentiment Falls By One Third

The research firm Investors Intelligence has been tracking investor sentiment for over four decades. The sentiment survey they released April 5 shows bearish sentiment dropped by a third compared to the previous week. This is the largest drop in the poll numbers since 2003 and shows that many bears have thrown in the towel.

The survey studies over 100 independent market newsletters to assess each author's current stance on the market: bullish, bearish, or correction. It has had a consistent approach since 1963. According to Investors Intelligence a 'normal' sentiment poll is 45% bulls, 35% bears, and 20% neutral. But the April 5 report shows bearish sentiment falling to 15.7% from 23.1% the week before. This 32% drop is the biggest single week drop in the last 7 years. Bullish sentiment is now at 57% and the Neutral camp are expecting a pullback but are generally long-term bullish:

"Normal" April 5 Difference
Bullish 45% 57% +12%
Bearish 35% 16% -19%
Neutral 20% 27% +7%

Investors often use this survey as contrarian indicator. Indeed, the survey's commentary says "At the end of last August's market lows the bulls were as few as 29.4%, suggesting a time to buy. The latest reading suggests danger. At the October 2007 top the bulls were 62%."

There have been 15 times since 1975 when the bearish sentiment collapsed by more than a third from one weekly reading to the next, as it did last week. In those 15 cases the S&P 500 averaged 0.1% return one month out, 0.8% return three months out, and 1.9% return six months out.

So if the next 6 months are typical we are entering a period of relative flatness for the S&P 500. Since covered calls work well in a sideways market, the next few months would probably be a good time to write calls against any uncovered positions you may have.

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