A sentiment survey reverses from a pessimistic level

Key points:

• The % rank for the Investors Intelligence % bulls survey cycled from < 10% to > 60%
• After similar reversals in sentiment, the S&P 500 tended to rise over the long-term
• With sentiment showing more optimism, the market could struggle for a few months

A sentiment survey reverses from deep pessimism to a more optimistic outlook

Investors Intelligence released the latest sentiment data this week, with one component, the % bulls survey, climbing to the highest level in more than a year. The recovery occurred from a level typically associated with significant stock market lows.

If I rank the % bulls survey relative to all other values since the inception of the data, the percent rank cycled from < 10% to > 60%.

Let's assess the outlook for stocks after similar conditions.

Similar reversals in sentiment preceded bullish long-term results 

When the % rank for the II % bulls survey cycles from < 10% to > 60%, the S&P 500 tends to see some follow-through in the near term. However, the 2-month window suggests the market could consolidate its recent gains. 

A year later, looks excellent, with only two untimely signals. Interestingly, they both occurred in an inflation/rate environment similar to today. 

The potential for a market consolidation looks even more pronounced when I apply the signals to sectors, with 6 out of 10 cap-weighted groups showing either flat or negative returns at the 2-month mark. 

What the research tells us...

Stocks have had a nice run since the October low, so it shouldn't be surprising to see sentiment indicators of all types improve from deeply pessimistic levels. One sentiment measure, the Investors Intelligence % bulls survey, reversed from a zone that suggests stocks could be on the road to recovery over the next year. However, we must remember that the road could be bumpy in the next few months.