It is that time once again where we see Wall Street analysts issuing their outlooks for the new year. Over the last week or so, several have issued outlooks for 2018 and they seem to be in agreement with one another. We have received forecasts from Credit Suisse, Deutsche Bank, UBS, and BMO Capital and all four of them are predicting double-digit gains for the S&P 500 next year.
While there are certainly more outlooks to come and we could certainly see some discrepancies in the forecast for the broad-market index, the current trend is concerning considering that the current bull market is already one of the longest in history. It is also concerning when investors or analysts are unanimously optimistic. It doesn’t happen very often, but contrarian investment theory suggests that when everyone is optimistic it is time to be cautious.
Humphrey Neill is considered by most to be the father of modern contrary investing thanks to his book, The Art of Contrary Thinking. One of Neill’s most famous quotes is “When Everyone thinks alike, everyone is likely to be wrong.” That quote is one of the basic tenets of contrarian investing and that is why the outlooks are concerning.
There are other factors that are concerning as well. Earlier this month the Investors Intelligence report showed the most optimistic reading since 1987, yes just before the crash. According to an article from CNBC, the II report showed 63.5 percent bullish compared to only 14.4 percent bearish, making the spread between the two percentages 49.1. According to the formula from Investors Intelligence, a spread of 30 marks “elevated risk” while a spread of 40 points suggests taking “defensive measures”.
Just over a month ago I wrote an article that mentioned how we haven’t had a five percent correction since June ’16 and at the time we had gone 336 days without that level of a correction. The streak has now reached 354 days and unless we see some serious selling pressure in the next few weeks, it looks like this streak will become the third longest streak in history. To become the longest streak without a correction of five percent, the S&P will have to hold on until January 19, 2018. That would mark the 395th trading day and it would eclipse the longest streak in history.
Looking through other quotes from Humphrey Neill and I couldn’t help but think of my favorite quote from him:
“The public is often right during the trends, but wrong at both ends.”