Back in mid-June, I wrote about how the sentiment indicators had made a major shift from overly optimistic levels to pessimistic levels. At the time, the ratio of bulls to bears was 1.82.
The ratio did drop to a reading of 1.34 on June 28, but then the bullish percentage started rising and the bearish percentage started declining. The ratio is now back up to 1.65. This is concerning because the ratio never made it to a reading of one or lower.
Over the last few years, the major pullbacks have ended when the ratio was at one or lower.
Looking at a chart of the S&P, the pattern that is developing is eerily similar to last year. We saw a dip in May and June of last year, followed by a rally in July and then another dip in August.
This year we saw a dip in May and June followed by a rally that started in late June. If the pattern continues to repeat, we should see another round of selling before the ultimate rally for the last third of the year.
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