The stock market’s seemingly unstoppable rise to record highs has boosted investor optimism to levels not seen since the Crash of ’87 – a very worrisome sign.
The difference between bulls and bears hasn’t been this high in 30 years, according to Investors Intelligence. The last time investor sentiment was this far apart, stocks rallied – until they didn’t. The Dow Jones Industrial Average collapsed 22 percent on Oct. 19, 1987, the worst one-day selloff in history.
Euphoria is a dangerous stage in the market cycle — when investors feel invulnerable and start to overpay for stocks. They become complacent with the expectation that they can sell their stocks to a “bigger sucker.”
“It is here where investors are at the point of maximum financial risk,” according to Russell Investments. “When we believe everything we touch turns to gold, we fool ourselves into believing we can beat the market, we cannot make mistakes, that excessive returns are commonplace and that we can tolerate higher levels of risk.”
Bulls in this week’s Investors Intelligence survey totaled 63.5 percent compared with 14.4 percent for bears, according to data cited by CNBC. That spread of 49.1 points is higher than the level editors say shows potential danger in the market.
A spread above 30 points signals “elevated risk” while 40 points calls for “defensive measures,” according to II’s formula.
“Sentiment readings have roughly followed their 1987 pattern,” II Editor John Gray wrote. “Then the bulls peaked (near 65 percent) with initial market highs early that year and they returned to above 60 percent levels months later after more index records. In 1987 stocks crashed a few months after that. A repeat of that scenario suggests potential significant danger for over the remainder of 2017!”
The Dow Jones Industrial Average rose less than 1 percent to a record high of 23,517.71 early on November 1.
Economic guru Jeremy Siegel predicts the Dow Jones industrials will certainly top 24,000 by year’s end.
However, the next milestone may be tougher to achieve, the Wharton School finance professor said.
“I think we’re going to get to 24,000,” the long-time bull told CNBC.
“I have almost never seen a week with this many Earth-shattering economic events,” Siegel said.
A jump in shares of consumer companies Mondelez and Kellogg after their quarterly reports on Tuesday, along with further gains for tech stocks, helped Wall Street end October on a positive note, Reuters reported. The three major indexes tallied their best monthly gains since February.
Third-quarter earnings in general have come in modestly above expectations. With more than half the S&P 500 components reported, earnings are estimated to have climbed 7 percent in the quarter, up from an expectation of 5.9 percent growth at the start of October, according to Thomson Reuters I/B/E/S.
“We continue to see better-than-expected economic numbers and corporate earnings,” said Peter Jankovskis, co-chief investment officer at OakBrook Investments in Lisle, Illinois. “I think fundamentally investors are really focused on those numbers more than the political noise, if you will, in the background.”