Short-term Outlook:  25% Bearish  As of Jan 12, 1134 SPX

Equity Indicators - Updates and Extremes

Investor's Intelligence Bull Ratio

The latest Investor's Intelligence survey showed a tick higher to a new five-year high in net bullish opinion among the newsletters they poll.  The percentage of bears remained low, and the percentage of bulls jumped to the highest since late 2007 when the S&P was about 30% higher than it is now.

Perhaps even more notable is that we're seeing this kind of optimism right as earnings season begins.  The chart below shows the only other two times in the past 20 years that we've seen at least 3 out of every 4 newsletters expect the market to rally just as earnings season began.

Those two episodes resulted in losses of -2.4% and -4.9%.

Let's go back further and see if there are any other instances.  We have to guesstimate the start and end of earnings season, but I believe it's pretty close.  From 1997 on, we use Alcoa's report as the beginning and Wal-Mart's as the end, and the distance between the two has been very consistent.  Applying that same average length of earnings season back to 1970, we can superimpose those dates against the I.I. sentiment survey.

The table below shows how the S&P 500 has performed during earnings season when the I.I. Bull Ratio was 75% or higher.  Also shown is the where I.I. sentiment was at the beginning and the end of earnings season.

 

S&P 500 Performance During Earnings Season When The I.I. Bull Ratio Was > 75%
Date	Return	Max Loss	Max Gain	II Ratio Begin	II Ratio End	Change In II Ratio
04/07/71	0.2%	-0.7%	3.6%	80%	67%	-13%
10/07/71	-7.9%	-9.1%	0.3%	77%	53%	-24%
01/07/72	1.1%	-1.8%	3.1%	78%	75%	-3%
04/07/72	-2.5%	-5.3%	1.4%	80%	68%	-12%
01/08/73	-4.0%	-6.7%	1.6%	79%	61%	-18%
07/08/75	-8.0%	-8.6%	3.4%	77%	57%	-20%
01/08/76	5.4%	-0.6%	8.5%	87%	84%	-3%
04/07/76	-0.9%	-2.6%	1.8%	78%	89%	11%
07/08/76	0.3%	-1.6%	2.7%	91%	83%	-8%
10/07/76	-3.5%	-5.2%	0.4%	83%	69%	-14%
01/07/77	-4.1%	-5.2%	0.7%	95%	75%	-20%
04/07/86	3.4%	0.0%	7.4%	81%	77%	-4%
04/07/87	-0.8%	-7.1%	0.9%	76%	68%	-8%
07/08/03	-2.4%	-4.7%	0.8%	77%	75%	-2%
07/07/04	-4.9%	-5.0%	0.1%	76%	60%	-16%
Average	-1.9%	-4.3%	2.4%	81%	71%	-10%

Out of 15 occurrences, only 5 of them ended up showing positive returns by the end of earnings season.  The maximum loss the S&P suffered during the approximate month-long trades was nearly twice as great as the maximum gain.

Also interesting is that in every case but once, sentiment receded during earnings season, showing that it's very difficult to sustain high levels of optimism during reporting season, as companies have to exceed not only official estimates, but also the "whisper" number traders hope to see.

On A Side Note...

Regarding the VIX sell signal we looked at yesterday, a subscriber alerted me to a great article from Chris Hendrix that goes into more detail about this signal (you can read the article here).  I attributed the signal to Robert McHugh, via Art Cashin.  I'm not sure who came up with the concept first, but wanted to make sure I mentioned Chris's work.