Is the bull market in stocks, now in its tenth year, reaching the frothy, speculative stage that is typical of a major top? Not according to an indicator created by top minds at the Harvard School of Business and NYU. Harvard professor Malcolm Baker and NYU finance professor Jeffrey Wurgler created a stock market sentiment index that has an impressive historical record of identifying periods of extreme bullishness (marking many market tops) or extreme bearishness (marking many bottoms). Note from the chart that the top of the internet bubble was the last time their index indicated extreme bullish sentiment that has occurred two standard deviations away from the mean, or only about 5% of the time. Currently, the index is not only significantly lower, it is actually below zero. Obviously, not all tops are accompanied by extreme bullishness – the market top in 2007 was one of those instances – but when extreme bullishness does occur, historically a market top is also at hand.
Bull Market Major Top?
| May 06, 2019