Using the Bullish-Bearish Indicator to Spot a Potential Market Bottom or Top

There are several Psychological Market Indicators investors can use to help them determine when a Market Bottom or Top is nearing.  One of the more important ones is the Bullish-Bearish Indicator which shows the % of Bullish and Bearish Investment Advisors.  This data is available from Investors Intelligence and is also published by Investors Business Daily as well.

Generally when there is a large difference ( >30%) between the % of Bullish and Bearish Investment Advisors there is an excessive amount of Bullishness in the market which usually is indicative of a nearing top.  The chart below compares the S&P 500 versus the % difference between the Bullish and Bearish Investment Advisors since 1998.  As you can see when the % difference between the Bullish and Bearish Investment Advisors is >30% the S&P 500 has generally made a top and then reversed strongly to the downside.   Some examples include last Summer (point A), the early part of 2001 (point B), the Spring of 2000 (point C), the early part of 2000 (point D),  the Summer of 1999 (point E) and even further back in the Summer of 1998 (point F).  Recently the % difference between the % of Bullish and Bearish Advisors reached near 30% again in January (point G) which was a warning sign that the S&P 500 was likely nearing a top after rallying strongly for three months.

Meanwhile on the flip side when the % difference between the Bullish and Bearish Investment Advisors narrows and approaches a very low value ( <= 0%) then there is an excess of Bearishness which is a signal the market is likely nearing a bottom and will begin to reverse strongly to the upside.   Once again using the chart of the S&P 500 versus the % difference between the Bullish and Bearish Investment Advisors below shows there have been four cases of this over the past four years.  They include last Fall (point H), last Spring (point I), in the Fall of 1999 (point J) and further back in the Fall of 1998 (point K).

As of mid February the chart of the % of Bullish and Bearish Investment Advisors versus the S&P 500 shown below indicates there is still a rather large difference between the Bullish (point L) and Bearish (point M) Investment Advisors.   Thus until the % difference narrows again and trends towards zero there may be more downside pressure in the market before a bottom is reached.