Optimism is not sign of bull market’s demise

Wall Street newsletter writers are as bullish on stocks as they’ve been in more than two years. But that doesn’t necessarily spell doom for the nearly eight-year old bull market.

Over 60% of financial newsletters in the latest weekly survey by Investors Intelligence said they were bullish, the highest reading since July 2014, Ari Wald, a technical analyst at Oppenheimer, said in a report. And while high bullish readings are normally a contrarian indicator (and often signal that stocks will do just the opposite short-term and go down or stagnate), Wald’s data show it’s “not a reason to embrace a long-term bearish stance.”

The S&P 500 stock index fell 0.4% Monday after notching its first record high of 2017 Friday.

While the S&P 500’s forward performance when the II survey bull reading tops 60% might be mixed short term (-0.4% a month later, on average, since 1985), it’s still bullish long-term. The S&P 500 has been 1.5% higher three months later, up 3.6% six months later and 9.2% higher a year out, Oppenheimer says.

The takeaway: “Investors,” Wald wrote, “should be buying (S&P 500) weakness rather than selling strength.”

The best performance for stocks is when the bullish reading of Wall Street newsletters is below 30%, which signals investor pessimism and sets stocks up for surprise gains in a washed-out market. The S&P 500 has been up 19.1% a year after the II bull count sinks below 30%.