This week, bloggers are extremely bullish to an extent not seen in more than a year. Is this a contrarian signal to be cautious? The short answer is no.
Below, similar levels of bullishness over the past 3 years are marked with a vertical line: a price chart of SPY is in the top panel with the views of bloggers shown in the lower panel. It's a small sample but in the seven previous times bloggers were roughly this bullish, SPY continued higher six times. Bullish bloggers were an excellent contrarian signal just once, in September 2012.
While this is not very encouraging, the good news is that financial bloggers are an excellent contrarian tell when they are bearish. Below is the same chart except we have highlighted extremes in bearish sentiment (using low bullish sentiment). The last ten times bloggers were as bearish as they were in January, SPY went higher the next week nine times. In one instance (May 2012), SPY was very close to a low but continued lower another 3 weeks.
The upshot for now is this: there may be reasons for caution but extreme bullishness among financial bloggers is not one of them.
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