The Chartcraft.com Investors Intelligence numbers continue to reflect very high levels of optimism. The percentage of bulls increased to 60.2% from 58.7% over the last week. Bearish sentiment declined to 16.1% from 16.3%.

The last time there were so few bears was 1987. Even during the bubble years of 1999-2000, bearish sentiment was higher than 16%.

However, as I've been saying, we don't know how many of those bulls have actually acted on their beliefs by buying stocks.

Larry

Larry

Was it on black Monday back in 1987 when the bears were so few?

Donnie

I didn't want to mention it, Donnie, because I didn't want anyone to get the impression that we're setting up for another crash. I don't have any reason to believe that we are. But, yes, it wasn't very long before black Monday. Kind of makes you wonder, doesn't it?

Larry

Larry,
Have you checked the historical COT records to see if the commercials predicted the crash before it happened?

Gary

Gary,

They went net short as of the report of September 30. The "Crash" occured on October 19. I remember it like it was yesterday.

Larry

Well that's a good sign for us small fry walking along behind the freight train isn't it. One more question. I remember in the smart money report you put out at the time the commercials switched, you stated that you could avoid a miscue by waiting one more week after they changed from long to short and if the market was higher than the last week, that would be your signal to short the market. When the commercials flip will you let your longs ride one more week before switching to short?

Gary

Gary,

The “wait a week” approach is an idea that comes from Henry Ford of Pitbull.com. It’s based on the time-tested strategy that technicians have been using for eons – buy weakness in an uptrend and sell strength in a downtrend. It’s also based on the notion that commercials tend to be early.

So if the commercials flip from being net short to net long on any given Friday afternoon, you would look to see if the S&P is down from the previous Friday. If it is, you would go ahead and buy. If not, you would wait until the following Friday, and if the commercials are still net long and if the S&P is down for the week, then you would buy. And so on.

It would be the mirror image of the above when the commercials flip from being net long to net short. If the S&P is up from the previous week, you would go ahead and implement short positions. If not, you would wait a week to see if they are still net short and if the S&P is up for the week to enter your shorts.

What it does is (at least historically) cut down on “false starts.” In other words, it cuts down on the times that you enter the market, following the smart money, only to have the commercials flip right back to where they were within a week or two. So historically is has significantly reduced the number of trades that you make and at the same time it has significantly increased the percentage of winners.

What do I do? I am not a pure mechanical trader. As I’ve stated elsewhere, I believe in multiple entries. What I did when the commercials flipped to being net long on March 28 is very typical of what I do. I read the COT report 30 minutes before the close and immediately covered all of my short positions. I also entered a few long positions. Then the following Monday, I bought more (it happened to be a rather big down day). And then I entered a few more longs from Tuesday through Friday, using any intra-day weakness to buy . So by the end of the following week, I was 100% long. I can’t say that’s what I’ll do every time, but it’s an outline of my general approach.

Larry