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As Bearish Sentiment Plummets, Here Is How The Market Fares Following Peak Bullish Extremes

Tyler Durden's picture


As Bespoke points out, bearish sentiment as calculated by Investors Intelligence in the past week plunged by a whopping 32 from 23.1% to 15.7%. This is the most bullish since late 2009. Empirically speaking, this is bad news for the market, as there are virtually no contrarians left and everyone is on the same side of the boat. As John Lohman demonstrates, the returns 1, 3, 5 and 10 weeks following a more than 25% drop in bearish sentiment are as follows: -0.92%, -2.07%, -1.99%, and -1.95%, respectively. Yet of all these, only the drop in November 2009 was actually executed in an environment of central planning such as the one that continues through today: and in that one the market actually rose 0.01%, 1.38% and 3.22% in the 1, 3, and 5 weeks following (and dropped 1.6% ten weeks later). Will the current shift in sentiment revert to the average, or will the market continue to price in aggressive Fed central planning? Stay tuned and find out.


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Wed, 04/06/2011 - 16:40 | 1142652 Johnny Lawrence
Johnny Lawrence's picture

When all the experts and forecasts agree, something else will happen.

Wed, 04/06/2011 - 17:08 | 1142758 covert
Thu, 04/07/2011 - 01:10 | 1144301 the mad hatter
the mad hatter's picture

stock market? who still plays in that rigged casino?!

Wed, 04/06/2011 - 17:21 | 1142760 Highrev
Highrev's picture

Looks like some of the best results happened during bear markets.

Go figure.


That having been said, if you were to press me, I'd have to say that we're probably moving more along a parallel of 1998 or 2000. But we're not exactly in a bull market, are we? So maybe Aug. 2002?

We're not in a bull market are we?


Wed, 04/06/2011 - 17:17 | 1142789 tallen
tallen's picture

The only way is UP! When the fed keeps on churning out those freshly printed dollars.

Wed, 04/06/2011 - 20:17 | 1143447 I am more equal...
I am more equal than others's picture

Those freshly printed dollars have to paid back.  When the market meets reality and the Fed is no more - will be like the ugly girl on prom night.  Alone, no way to get home, and wishing we hadn't dropped those big girl panties for that bernaked boy.  In 9 months that suprise package will be sucking those A cups dry and saggy.

Wed, 04/06/2011 - 17:59 | 1142928 tmosley
tmosley's picture

When predicting markets, yes, when predicting government interventions, not so much.

Wed, 04/06/2011 - 18:47 | 1143162 New_Meat
Wed, 04/06/2011 - 20:50 | 1143538 American Dreams
American Dreams's picture

If your the Johnny Lawrence that used to be an ML Green Mountain jockey then you have been around long enough to know that the Fed hasn't ever been this knee deep in the markets and that even the simplest reversions to the mean do not apply in this environment.  Just sayin' - btw if you are the true JL then much respect brother, hope you are well.


there be no shelter here

Wed, 04/06/2011 - 20:49 | 1143543 American Dreams
American Dreams's picture


Wed, 04/06/2011 - 20:46 | 1143545 American Dreams
American Dreams's picture


Wed, 04/06/2011 - 16:40 | 1142653 TriggerFinger
TriggerFinger's picture

It wuz a be-uteefull day. I was jes settin on the back stoop anna drankin a big glass o ahs tay when sumpthin sploded. Doc sez it wuz the rot anteer lobe o ma brain. He sez I gotta drank whiskey aforin brekest, and all day long everday til the swellin stops. I told Doc he wuz crazy as shit anna that all I needed ta do wuz BTFD

Wed, 04/06/2011 - 16:40 | 1142655 jkruffin
jkruffin's picture

Nothing beats MAGIC FUTURES!!!!!!! lol

Wed, 04/06/2011 - 16:42 | 1142663 kavaron
kavaron's picture

Like most other indicators, sentiment strategies stopped working on 2011.

Wed, 04/06/2011 - 16:46 | 1142688 Cdad
Cdad's picture

Correct.  All correlations have stopped working.  The only elements left to contemplate are how much free money is sent to its death in the market, and where Street expectations are.  You can get info on the first, but on the second, you are not in the club.

Therefore, there is nothing left to trade but the fundamentals of a broken economy however temporarily held in a state of suspended animation...with expiration set for June.  So good luck trading that.

Wed, 04/06/2011 - 17:02 | 1142745 Johnny Lawrence
Johnny Lawrence's picture

They didn't matter during the real estate boom...until they did. 

Wed, 04/06/2011 - 16:44 | 1142667 ZeroPower
ZeroPower's picture

We were all bearish Q2 '09 and look what happened.

Wed, 04/06/2011 - 16:46 | 1142684 Calvin Jones an...
Calvin Jones and the 13th Apostle's picture

The market won't drop until QEII ends.  Once The Bernank pulls away the punch bowl, we'll see something closer to reality and less fantasy.

Wed, 04/06/2011 - 16:55 | 1142720 rubearish10
rubearish10's picture

Probably not that simple, especially if everyone thinks so. It will not end but the definition and structure of USD fleecing will change, allowing this calamity charade to continue.

Wed, 04/06/2011 - 17:13 | 1142770 cosmictrainwreck
cosmictrainwreck's picture

speaking of that....what's with gossip that fed gov's think to end QE "early"; just more smoke? any effect (besides Dow UP another 38)?

Wed, 04/06/2011 - 16:49 | 1142704 treemagnet
treemagnet's picture

It can't crash till it goes straight up, so we're close.

Wed, 04/06/2011 - 16:52 | 1142709 RobotTrader
RobotTrader's picture

With consumer discretionary names tied to housing rocketing up 9% to new world record highs, it gives me some pause about shorting anything right now.

Also, banks were very strong, and PIIGS banks were even stronger.  So today's sellof was probably a headfake.

The dollar keeps selling off and gold still has a good bid.  Still "Risk On".


Wed, 04/06/2011 - 17:13 | 1142775 Id fight Gandhi
Id fight Gandhi's picture

Bbby is questionable at best. Nobody is shopping for furnishings elsewhere. I bets the books are cooked here.

But whatever it will rally because that's what fraud does.

Wed, 04/06/2011 - 17:45 | 1142879 slaughterer
slaughterer's picture

Didn't Harry Wanger sell his urinal cookies through this store?  No wonder they are doing so great...

Wed, 04/06/2011 - 18:00 | 1142934 disabledvet
disabledvet's picture

Was the point of QE to get the stock market higher or keep interest rates low?  I'm still confused.  How can we have both?

Wed, 04/06/2011 - 16:56 | 1142712 random shots
random shots's picture

You are starting to sound like CNBC, Tyler.

Looking at the chart, there has been only one time in eleven previous instances where the market fell 5% or more 10 weeks later. And in that one year (1998) the S&P 500 was up more than 20% for the year. I am not saying BTFD but come on...

I'm sure all you "hedge fund guys" in the comment section who arre managing your lunch allowance with 10x leverage are spooked by a 2% move...

Wed, 04/06/2011 - 17:41 | 1142867 bogey4
bogey4's picture

I'll criticize TD when I consider it warranted, but this post merely points out some statistics... with little or no opinion given.

Wed, 04/06/2011 - 19:02 | 1143211 Eternal Student
Eternal Student's picture

Well, I question the statistics, unless I'm misreading what was written. It looks like the numbers at the bottom of the chart are for all of those periods. And not the "... weeks following a more than 25% drop in bearish sentiment."

If you look at the numbers where there was a greater than 25% drop, for the first week, I get:

(.91 + 1.61 - 0.8 - 1.38 - 2.62) / 5 = -.46 %

which is actually better than the -0.92 % claimed. So I assume the original statement meant "more than a 20% drop", not 25%.

So, if I've missed something here, please let me know.


Wed, 04/06/2011 - 19:54 | 1143364 FOC 1183
FOC 1183's picture

You are right - the study looks at weeks where sentiment fell by 20%, not 25. So, the results are as stated.

Wed, 04/06/2011 - 20:02 | 1143390 Eternal Student
Eternal Student's picture

Thanks for the double-check.

Wed, 04/06/2011 - 16:54 | 1142715 InconvenientCou...
InconvenientCounterParty's picture

Central planning does not include the mechanism of it's own termination.

It's like the Borg -- a one way ticket.

Wed, 04/06/2011 - 16:52 | 1142718 spongeBOB
spongeBOB's picture

BBBY forcasts 50% drop in EPS for Q1 from Q4 and shares rally 7%.

Wed, 04/06/2011 - 17:13 | 1142769 1fortheroad
1fortheroad's picture

It must be the new math kinda like the captcha.


Wed, 04/06/2011 - 17:25 | 1142809 spongeBOB
spongeBOB's picture

No, its the new scam. Lower estimates + beat lowered estimate = Shares rally

Wed, 04/06/2011 - 16:55 | 1142721 twotraps
twotraps's picture

Unprecedented intervention, completely insolvent banks and the govt actively demonstrating that absolutely no financial progress will ever be made............but lets just use historical data to extrapolate where the 'market' will be given the circumstances!  There are no data points, and its not a 'market'.  These are big problems.  If anything its a monument to what an awesome job the US has done to foist the greatest scam ever in forcing, I mean strongly suggesting, the planet be run with Dollars.  Can you imagine investing billions of pension money in govt bonds of a country that says its going broke?


Honestly, we cannot expect anyone in Washington to balance the Pretend Account that is the entirety of the US Govt.  Its a fantasy account used for political purposes only.  I love it when people argue that Clinton balanced the budget, really?  We are not going to change Washington, not in this comment, this article and not in many elections...sadly.  

Wed, 04/06/2011 - 17:21 | 1142798 Note to self
Note to self's picture

Clinton's budget closed by accident - all the newly enabled day traders making a fortune during the dot com spike had to pay a s**tload in short term capital gains.  Clinton never saw it coming, but accepted it happily.

Thu, 04/07/2011 - 02:13 | 1144373 Urban Redneck
Urban Redneck's picture

Clinton's budget gap was not closed by accident or by the congress.  It was closed by Rubin (GS) & Greenspan trading the 30 yr fixed mortgage on America for a short-term ARM liar loan.  It worked so well they sold the idea to a whole generation of American home buyers.  

Wed, 04/06/2011 - 18:01 | 1142948 disabledvet
disabledvet's picture

Ask the EU.  They're buying Portugal.

Wed, 04/06/2011 - 16:58 | 1142737 unky
unky's picture

is there a typo ? u mean 21.3 %, right ?!

Wed, 04/06/2011 - 17:08 | 1142761 Truthiness
Truthiness's picture

I would not be shocked one bit if we see Dow 14k by December. Nor would I be shocked if we see Dow 11k. The truth is none of us know what the market is going to do. Too many variables.

But I think it's safe to say Ryan's budget isn't going to become law anytime soon and nor will anything comparable from the democrats. Thus the debt burdens and their corrolary outcomes will continue to snowball. 

We're f**ked bitchez! 

Wed, 04/06/2011 - 17:18 | 1142782 Id fight Gandhi
Id fight Gandhi's picture

I would not be shocked to see Dow 8000 or 14000 this year. Could go either way based on the exact macro fundamentals. That's scary.

Wed, 04/06/2011 - 17:18 | 1142784 buzzsaw99
buzzsaw99's picture

There is no sentiment, there is only the bernak.

Wed, 04/06/2011 - 17:19 | 1142793 slaughterer
slaughterer's picture

This is a contrarian indicator. Time to press the SELL button, before fat finger Goldman does.

Wed, 04/06/2011 - 17:33 | 1142828 Saxxon
Saxxon's picture

The HFTs arrived in full force with the 2009 'Bull Market'.  Thus we have only seen the bots bull up prices.

We get volume on sell days; otherwise slow melt up on anemic volume.  Yada yada, everyone here knows that.

A favorite table-pounding theory of mine . . . when the Bots finally turn and sell, there will no stopping them.  Not the Fed.  They can call Dimon or Lloyd but they will just deny it is them darkpooling shares out the back door.

That is when you want to be short.  That is when SRS, ZSL and SPXU will become desirable.

Wed, 04/06/2011 - 17:37 | 1142850 Pepe
Pepe's picture

perpetual motion market......mmmm..probably not

Wed, 04/06/2011 - 17:41 | 1142859 ivars
ivars's picture

It will look closer to minimum - minus 13% after 5 weeks.

Wed, 04/06/2011 - 17:42 | 1142861 PulauHantu29
PulauHantu29's picture

Perhaps Bullishness will double once again if the Radiation-Saturated Winds from Japan start blowing West over China and Russia contaminating every living (and inert) entity in its way.

I m ean, can you get any more Bullish (by Wall Street standards) then this?

Wed, 04/06/2011 - 17:59 | 1142929 jkruffin
jkruffin's picture

Notice the scaremongering has already started, immediately following the FOMC minutes. I sure hope QE3 does not happen, and it shouldn't, but I am not in control of it. It sure seems they are prepping to announce QE3 just like they did with QE2, yet earlier to prevent erasing their gains over the last few months.

Mr. Benny Bubbles wants SP 1500, or oil $150 whichever comes first, and until he gets it, he will PRINT!!!!!!!!!!!!!

Magic Futures what else?

Wed, 04/06/2011 - 18:00 | 1142942 rich_wicks
rich_wicks's picture

The Federal Reserve controls the markets.

Wed, 04/06/2011 - 18:11 | 1142944 razorthin
razorthin's picture

Hopefully these assclowns are shorting themselves.  Fukking sheep.  The market only stays irrational longer than you are solvent if you are a dumbass with no risk control strategy.  And, if you are dumbass enough to be all in invested at these overbought levels.  Trading, of course, is different entirely - but I don't think that is what these numbskulls are proporting to be doing.

Wed, 04/06/2011 - 18:18 | 1143023 rosiescenario
rosiescenario's picture

So much for the histrory lesson for today...don't let it confuse you. In our New Era of POMO, HFT, and BTFD you sure do not want to be short anything...especially anything already over valued...the algos are attracted to those stocks like flies to a steaming turd.

Wed, 04/06/2011 - 20:06 | 1143395 whatz that smell
whatz that smell's picture

dead on. like turd moths to a turd flame.

imagine a day when machines kill traders to earn a profit...

oh, fuck.

Wed, 04/06/2011 - 18:19 | 1143029 miker
miker's picture

"They" will hold the market up at all cost.  Impose all manner of trading rules and limits and even shut down the market to prevent collapse should something come along that would panic the public. 

I fully expect Japan to implement a shutdown of the stock market there once everyone figures out how fucked they reallyl are.

Bottom line, they can hold this thing up in all manner of ways and will.  That being said, the overall market will probably be a shitty place to invest over the next 5-10 years.  Most companies will peak with earnings.....where's the growth?  The only place to make money trading will be with speculative items (pump/dump) and even those will be much shorter lived than in the past. 

This will be the stock market of the 50's....plodding, boring, no more fun.  Go out and do something different and useful with your life!

Wed, 04/06/2011 - 19:50 | 1143183 99er
Wed, 04/06/2011 - 19:10 | 1143243 max2205
max2205's picture

What happens when Bens put is widely known. 5% up days again?

People will just pile into vertical moves. And.....

Wed, 04/06/2011 - 21:03 | 1143600 JoeStocks
JoeStocks's picture

Interesting observation from Keene Little at

As has been true for many days since last July and especially since the March low, the day started with another gap up. It's been a consistent pattern with the overnight rallies but it hasn't helped the regular trading hours (RTH) traders. As we've seen so often in the leg up from March, the initial morning rally was again sold into. I've been keeping track of the rally from March 16th in terms of how much the S&P futures (tracking ES, the e-minis) move in the overnight session, resulting in morning gaps, vs. the moves during the RTH sessions. Most of the overnight moves have been positive and in the 15 trading days since the March 16th close there have been 11 gap-up mornings, 3 gap downs and one opened flat.
On the Market Monitor we've been recommending (with tongue in cheek but with a small amount of seriousness) going long ES at the close and then covering at the open the following morning. John Gray calls it the NTS trade -- the Nocturnal Trading System. With 11 out of 15 successful trades (granted, most of those successful trades were identified in hindsight) that's a 73% success rate and a trading system with that kind of success will make you money.
With mostly gaps to the upside the overnight sessions since March 16th have added 73.25 ES points to the rally. It would have been nice for the bulls if we had seen follow through to the upside following the bullish overnight sessions but during the RTH sessions ES has added only 4 points. So basically what's been happening is we've been getting overnight rallies that create some early-morning liquidity as the cash market plays catch-up, which is then used by smart money managers to unload their inventory a little at a time. Rinse and repeat the next night and day, use the morning rallies to sell into and when done, let the market fall so you can buy it back cheaper. We're now waiting for the part where they let the market fall.
It's abundantly clear with these numbers that the futures market is being manipulated higher each night as a way to hide the distribution that's going on each day. The rally from March 16th is about the clearest sign of distribution (blatantly so) that I can remember seeing. It hasn't helped the bears in short positions but it does give us a heads up that the trend is about to change (or at least make any further upside suspect). If you're in long positions you should be watching this very closely and pulling your stops up tight (trail your stop up below the series of higher lows) and look to lighten your exposure to the long side. It might be a bit early to think short, although it's a good time to start nibbling as the indexes are up against resistance.
Wed, 04/06/2011 - 22:06 | 1143793 gigeze787
gigeze787's picture

'PRAVDA-West' aka CNBC declares victory:

Bears Give Up: Biggest Switch In Sentiment in 7 Years

Thu, 04/07/2011 - 02:22 | 1144383 Urban Redneck
Urban Redneck's picture

The Bernanke outlawed shorting when he demonstrated a willingness to implement new FED policy prior to market open on expiration day.  With shorting outlawed, equilibrium is impossible to quantify, and sentiment becomes irrelevant.  BTFD

Thu, 04/07/2011 - 03:21 | 1144419 TexDenim
TexDenim's picture

Until Zimbabwe Ben has "bearish sentiment" these studies are useless. His opinion is the only one that counts.

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