Critical Market Indicator “Just Flashed Red”
The Last Time This Happened, the Stock Market Crashed 56%
The last time investors were this bullish, we saw a stock market crash of over 50%.
Investor sentiment hit a nine-year high in November, according to the Wells Fargo/Gallup Investor and Retirement Optimism Index. The indicator registered 96 last month, marking the third straight quarterly rise and up from 79 in the third quarter. (Source: “Wells Fargo/Gallup Survey: U.S. Investor Optimism Surges on Prospects of a Better Economy,” Wells Fargo * Co, December 20, 2016.)
Of the seven index components, investor optimism improved the most on the outlook for the broader economy. Nearly 57% of respondents were optimistic on the U.S. economy, up from 45% in the third quarter. Only 27% were pessimistic, down from 35% in the previous survey.
“There’s a reason for the optimism as the U.S. economy is slowly chugging along.” Scott Wren, senior global equity strategist at the Wells Fargo Investment Institute, said in the release. “Whether the markets are experiencing a post-election or Santa Claus rally, investors should continue to focus on the fundamentals, valuations, and where the economy and earnings are headed over the next six to 12 months.”
Improving investor sentiment tends to be a bearish signal. When public opinion reaches a consensus, it is usually wrong. Historically, investors get too bearish after they have already fallen and too bullish after prices have risen.
The last time investor sentiment was this optimistic was May 2007. That month, the index reported a reading of 95. Over the next two years, we saw a broader stock market crash of 56%.
A number of stock market indicators also suggest that stock market levels may be getting frothy. The CBOE Volatility Index (VIX), which some traders call the “investor fear gauge,” is nearing record lows. Other metrics, including junk bond demand, the put/call options ratio, and the number of stocks hitting 52-week highs, indicate investor sentiment is extremely bullish.
Of course, trader enthusiasm is no guarantee of a stock market crash. The previous financial crisis was triggered by toxic mortgage debts, not inflated equity valuations. The number, though, does suggest that the easy money from the recent stock market rally has already been made.
Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. We are 100% independent in that we are not affiliated with any bank or brokerage house. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose. The opinions in this content are just that, opinions of the authors. We are a publishing company and the opinions, comments, stories, reports, advertisements and articles we publish are for informational and educational purposes only; nothing herein should be considered personalized investment advice. Before you make any investment, check with your investment professional (advisor). We urge our readers to review the financial statements and prospectus of any company they are interested in. We are not responsible for any damages or losses arising from the use of any information herein. Past performance is not a guarantee of future results. All registered trademarks are the property of their respective owners
Sign up to receive our FREE Income Investors newsletter along with our special offers and get our FREE report:
5 Dividend Stocks to Own Forever
This is an entirely free service. No credit card required. You can opt-out at anytime.
We hate spam as much as you do.