Excess Bullishness

In the past I have compared stock market sentiment to a compass. Sentiment does not tell you precisely where you are in a rally or a decline but it helps you get your bearings. Excessive optimism tends to occur in the latter parts of a rally and most indicators are pointing towards excessive optimism.

Last week I pointed to some signs that the crowd may have turned excessively bullish and  since then some more signs have piled up.

• Market Vane bulls are the highest since June 2007.


• The NAAIM survey of manager sentiment is above 80, which has been about as high as it gets.


• The 10 day moving average of the CBOE put/call ratio is the lowest its been in one and a half years.


• I spent quite a bit of time this past week listening to Bloomberg radio and there was not a single bear.

The vast majority of sentiment indicators are now pointing to excessive optimism. The anecdotal evidence I am seeing is pointing to excessive optimism.  While these periods of excessive bullishness tend to last longer than they used to, they still do not tend to end well.