The Big Money Turns Bullish

A recent survey of large money managers by Barron's shows an uptick in optimism that historically has preceded gains for the stock market. 

The Barron's Big Money Poll surveys professional money managers at large firms, twice a year to gauge their sentiment on the market's outlook. In the latest fall survey, the percentage of managers describing themselves as bullish rose to 38% from only 8% in the spring survey. 

While 38% bullishness may still seem low, it's a notable improvement from the spring's extremely pessimistic reading. As Jason Goepfert of Sentiment Trader (a research partner of ours) notes, when optimism recovers from very low levels in this survey, it has been a reliable bullish signal for stocks. 

Specifically, whenever the bullish percentage rises from below 25% bullish to over 25% bullish, the S&P 500 has never shown a negative return in the next 3, 6, or 12 months. The average maximum gain over the following 12 months has been 20.7%, as shown in the far right column in the chart below. You’ll see the date of every instance in the left column, a red dot on the S&P 500 chart for where those instances occurred, and then the returns of the S&P 500 over different time frames, averaged at the bottom. 

The theory is that after extreme bearishness, an improvement in sentiment means large money managers have more dry powder and willingness to put money to work in stocks again. Their buying then provides fuel for the market's gains.

Past examples of this dynamic playing out occurred in early 2003 and 2009, when optimism bottomed near zero, but then recovering readings preceded sharp rallies. 

Of course, the sample size is small, and past performance never guarantees future results.

However, the consistent historical tendency provides a bullish data point for the market here. With the Big Money survey joining other sentiment measures in bouncing off lows, it adds another data point to the bullish side of the ledger and supports the growing potential for stocks to sustain an upward trend.

Talk soon!

Shean