Sentiment Signal Suggests Increase Chance of a Pullback

The S&P 500 Index (SPX) has been consistently nabbing fresh records over the past nine months, and many stock market newsletters expect this to continue, according to the weekly sentiment survey conducted by Investors Intelligence (II). Each week, II reviews more than 100 published newsletters, emails, and market bulletins and determines the percentage that are bullish, bearish, or expecting a correction (short-term bearish; longer term bullish). Recently, the percentage of bullish newsletters came above 60% for the first time since the end of 2024.

The II poll is considered a contrarian indicator, meaning the bullish sentiment could have bearish implications for the stock market. This week, I’m examining the historical data to see if that concern is backed up by the numbers.

For the numbers below, I used data on the II poll that date back to 1965, detailing times the percentage of bullish newsletters rose above 60% for the first time in at least six months. The most recent signal occurred in the poll released on January 28, with data for the week prior. Historically, there have been 22 prior occurrences, and in those cases the SPX tended to underperform. Over the six months following these signals, the SPX averaged a 2.32% return, with 59% of the returns positive, versus its typical six-month return of 4.25% and 69% positive. One-year results are similar, with an average of 4.84% after extreme bullishness, compared to a normal average of 8.59%. It’s also worth noting that the one-year win rate was about the same as underperformance due to less upside and more downside

Next, I broke down those 22 instances of when bulls in the II sentiment poll moved above 60% by whether the SPX was within 1% of an all-time high — such as the signal prior — versus other times. The data suggests caution going forward, with 10 of the 22 signals occurred with the SPX essentially reaching an all-time high. The average SPX return after these instances was negative over the next one and three months. What’s more, six and 12-month returns were a mere 1.84% and 2.06%, respectively. The extreme bullishness in this poll suggests an increased chance of a pullback.

This next table goes back to 1965 and breaks down SPX returns going forward based on the percentage of bulls from the II sentiment survey — again, a reliable contrarian indicator. The color-coded table makes it easy to see the SPX returns were at its lowest when the percentage of bulls in the poll were above 60%. When the bull percentage was low, however, that’s when the stock returns were at its highest.