S&P500: Bullish Sentiment Creeps Higher

New York (May 14)  The S&P 500 (SPY) has started off the month strong as it has registered a 3% gain as we head into the second half of May. On the back of this strength in the market, bullish sentiment has also climbed and is back to more neutral levels. Over the past 30 years, the more durable bottoms have formed when the market saw a complete washout in sentiment and more bears than bulls. Based on the current sentiment picture, we have not seen the washout that we typically see after an 8% decline or more in the market. While bullish sentiment has dropped to 2-year lows and this makes for a nice headline, bullish sentiment has not dropped to levels seen at previous 8% or larger declines in the S&P 500. This is significant as we did not have any 8% plus declines in the past two years and therefore the fact sentiment touched 2-year lows doesn't mean all that much.

When looking at sentiment for the market, I prefer to look at as many different indicators as possible to try and find a balanced reading. Just as a doctor would not solely use a stethoscope if you stepped into his office for a check-up, it would be irresponsible in my opinion to base all of one's analysis on a single sentiment indicator. This is why I use up to 5 different sentiment indicators (some weighted slightly more than others) to get the most reliable overall temperature reading for the market.

Daily Sentiment Index Data

Taking a look first at Daily Sentiment Index Data, we can see that bullish sentiment has climbed to nearly 60% bulls as of Friday's close. While we did see a few readings near the 10% bulls level and we've clearly seen a massive change of character from January levels, we only got a moderate wash-out in sentiment. Looking at the sentiment chart below, which shows sentiment for the S&P 500, we can see that a double bottom was formed and we've now slightly broken the downtrend in bullish sentiment. This tells us that more bulls are coming back to the market and we only saw a few days of sentiment under the 20% level.

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