The stock market excitement is drawing more and more skepticism from watchdogs, concerned that the market’s euphoric state is similar to economic collapses we’ve experienced in the past, like Black Monday and the dot-com bust of the late 1990s.
The gulf between bulls and bears in terms of sentiment on the market hasn’t been this wide since early 1987, directly preceding the Black Monday market crash, according to the latest Investors Intelligence reading. Black Monday amounted to the worst single-day sell-of in the history of the market when the Dow plummeted by 22% on October 19, 1987.
Bulls in this week’s survey totaled 63.5%, while the bears only accounted for 14.4%. A spread above 30 points signals “elevated risk,” while a spread of 40 points calls for “defensive measures.”
“Sentiment readings have roughly followed their 1987 pattern,” Investors Intelligence editor John Gray wrote. “Then the bulls peaked (near 65%) with initial market highs early that year and they returned to above 60% 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!”
And the survey is not alone in projecting a potential stock market collapse. Valuations measured by what is known as the “Shiller CAPE,” a measure of price to earnings over a 10-year period, just reached similar levels it hasn’t touched since the dot-com collapse of the late 1990s.
“This boat is now standing room only,” said Peter Boockvar, chief market analyst at the Lindsey Group. “I still can’t figure out why some think there is no euphoria in markets when one has to go back 30 years to see this wide a spread between bulls and bears.”
The fact that several metrics are pointing towards the U.S. stock market drifting towards bullish levels that we haven’t seen since two of the worst recent economic collapses in modern history is continuing to worry many analysts and investors alike.
“Market optimism hits Black Monday-level peak, a ‘potential significant danger‘,” CNBC, November 1, 2017.