By Carl Swenlin with Decision Point
Sentiment readings were very bullish across a range of indicators this week. To begin, Investors Intelligence Advisor Sentiment had its highest percentage of bulls (58.8) since the October 2007 market top.
The American Association of Individual Investors poll had the highest percentage of bulls (63) since October 2004, and the lowest percentage of bears (16) since October 2005.
Finally, the National Association of Active Investment Managers (NAAIM) shows that on average they are 81.83% invested. This is in the high end of the range and shows that these managers are quite bullish.
While high levels of bullish sentiment among advisors, investors, and money managers usually occur at market tops, market tops do not always occur when sentiment is very bullish. Sometimes people respond to the obvious and correctly align their market posture with the price trend. In situations like this we have to wonder whether or not they are wrong.
Bottom Line: An excess of bullish sentiment is a caution sign and should cause concern because such sentiment peaks are often followed by price corrections, if not bull market tops; however, we do not use sentiment as a timing tool, just a indicator to help paint a picture of the market environment. So far we have no indication from our trend-following models that there are major problems ahead.