When Bullishness Is Bearish

Recently, the Investors Intelligence research group noted that financial newsletter writers are becoming cheerier in their prognostications, with bullish sentiments at the highest level since their lows in March, and bearish sentiments at a five-year low.

That's a bit surprising to me. You'd think, for example, that newsletter writers would be savvy enough to know that once the market crashes, it's usually a great time to buy, as most stocks are on sale. They seem to be coming around to that perspective, but sheesh -- the stock market has advanced over 60% since March!

Quite the contrary ...
Still, the information is still useful. For one thing, many contrarian investors take general bullishness as a red flag in the market. If most investors are expecting great things, then they're likely buying stocks, and sending prices up. Markets tend to start slumping during times of elation, not hand-wringing. Yet we needn't run for the hills right away, because bullishness doesn't always spell imminent danger. According to the folks at Bespoke Investment Group, the bull market from 2003 to 2007 frequently sported the kind of bullish sentiment that we're seeing right now, but stocks continued to rise over the years.

In a similar vein, our Motley Fool Rule Breakers team also interprets bullishness as a contrary indicator. As Fool co-founder David Gardner explained recently, one of his criteria for finding rule-breaking dynamic growers is that "You must find documented proof that it is overvalued according to the financial media. ... If a company's growing earnings lead to an increasing valuation, someone somewhere will surely argue that the company is overvalued." He also observed that when that company later proves that it wasn't overvalued, skeptics will start buying, sending the share price up and benefiting early investors.

To look for such companies, you can turn to our Motley Fool CAPS community and screen for those with rapid revenue and/or stock price growth, high P/Es, and high rankings from CAPS members. Here are some such contenders for further research:

Data: Motley Fool CAPS.

So be skeptical and contrary when you run across bullishness (or bearishness!) in the media. Think for yourself and draw your own conclusions, and you're more likely to profit.