As stock momentum wanes, a caution flag rises

NEW YORK — It’s been more than a week since the red-hot Dow Jones industrial average hit a record high. That begs the question: Is the bull market showing signs of fatigue?

A trader works on the floor of the New York Stock Exchange.

With stocks trading at lofty levels, trying to spot “caution flags” is a prudent exercise. One thing to consider is the Dow seems to have lost its upward momentum after cruising to its Aug. 2 all-time closing high of 15,658.36. It not only had its six-week winning streak snapped last week, when it dipped 1.49%, the blue-chip gauge also posted a mild drop of 5.83 points Monday to close at 15,419.68.

The detective work of Rocky White, senior quantitative analyst at Schaeffer’s Investment Research, has alerted us to another possible sign of trouble. An expert in investor sentiment, he notes that even though the Dow fell last week, the percentage of financial newsletter writers surveyed for the Investors Intelligence Sentiment Survey that are “bearish,” or negative on stocks, actually declined to 18.5%. That was the lowest level of bears since May 2011 and above the long-term average of 35%.

While White stresses it’s just one tool to gauge the market’s mood, fewer bears is alarming because the sentiment survey is a “contrarian indicator.” The crowd tends to be wrong at market turning points. “The fewer the number of bears, the worse the market tends to perform,” he notes. The three-month return for the Standard & Poor’s 500-stock index is 1.5% when the percentage of bears is 11% to 22%. The return rises to 3.9% with 41% to 61% bears.

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