Stock market sentiment – indicating top

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In addition to fundamental and technical analysis, it is particularly important to measure the crowd’s sentiment regarding extreme bearishness or bullishness. A convenient tool for this is provided by the Investors Intelligence survey of investment advisors.

According to the latest reading (April 27), 54.0% of advisors are bulls (up from 34.1% in February) and 18.0% are in the bear camp (down from 27.8% in February). As shown below, the last time bullish sentiment was at this level was in December 2007 when the S&P 500 Index was trading 26% higher at 1,500.

Source: Bespoke, April 28, 2010.

“Bulls around 55% and fewer than 20% bears are the first indications of a market top. As mentioned last week, we now classify the advisory sentiment as negative, similar to the outlook that started this year [and preceded a 9% correction]. Markets can still move higher and the bulls could approach 60% before a final top is in place. In the near-term, though we would expect a modest pull back to consolidate the near three-month rally. At present we do not project a correction approaching 10%,” said the report.

I am holding a cautious stance here.

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