McClellan Chart in Focus: Investors Intelligence Bull-Bear Spread – By Tom McClellan


Chart In FocusWe saw a really high degree of bullishness back in January 2018, when the U.S. stock market was making a big blowoff top.  Since then, the major averages have struggled to move higher, and so has bullish sentiment.  But in July 2018, we saw the Investors Intelligence Bull-Bear Spread move up again above its upper 50-1 Bollinger Band (BBand).

That is a clue that sentiment is getting too far extended, but it is not enough by itself to say that the market is all done going up.  What is needed is a crossing back below the upper 50-1 BBand to say that a top is at hand.  And while this is a useful indication, it is far from being a perfect one.

The “50-1” Bollinger Band designation means that I am using a 50-day lookback period for both the centered moving average and for the standard deviation.  The upper and lower bands are set 1 standard deviation above and below that centered 50-day moving average.  Most software programs use a 20-2 setting as the standard for Bollinger Bands, but I have found that 50 days and 1 standard deviation is a useful pairing for sentiment indications.

And for the Investors Intelligence numbers, the 50-1 Bollinger Bands provide an interesting additional bit of information.  Going above the upper band says that the investment advisors and newsletter writers tracked by Investors Intelligence are getting more bullish, which is an interesting development.  But dropping back below that upper band is the key insight.

A drop back below that upper 50-1 BBand is often (but not always) a sign of an intermediate term top for stock prices.  The latest data from Investors Intelligence are showing a slight decline in the percentage who are “bulls”, and that means the bull-bear spread has dropped back below the upper band.  The message here is that we are seeing an intermediate term (i.e. over a few weeks) top for prices, the outcome of which should be a meaningful decline for stock prices.

Our other work on liquidity, cycles, and seasonality suggests that a bottom in late August to mid-September is the most likely end point for such a presumptive decline that the Investors Intelligence data are describing.

Tom McClellan
Editor, The McClellan Market Report

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.