Expect a Few Bumps as Equities May be Getting Stretched

By Rob Williams, Sage Advisory

Several of the technical/sentiment indicators we monitor are suggesting equities may be getting stretched. One indicator in particular caught our eye. The American Association of Individual Investors Bullish/Bearish Sentiment (below) reached a multi-year high last week signaling extreme bullish sentiment toward equity markets among individual investors. The current reading is a standard deviation above the norm (on a 4-week moving avg. basis), suggesting investors have become too bullish and begging the question, are we in for a correction near-term?

We dug into what this level has meant in the past for investors, at least over the last 13 years. This level has been hit three times previously since 2005. In all cases markets experienced some volatility and small drawdowns ranging from 1%-6% at some point during the following three month. However, in all three cases the S&P 500 Index was higher three months later, by an average of 3.3%. Bottom line, we are likely to get a small/medium correction soon, but given the fundamental picture, it would not be the start of something larger.  And, if the correction is greater than 10%, we would likely consider it a good buying opportunity.

This article was written by Rob Williams, head of research at Sage Advisory, a participant in the ETF Strategist Channel.

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