The Bank of America Bull-Bear indicator is a measure of investor sentiment that goes back a long way.

I want to debunk the idea of it as a sell/buy sellnal, and instead, present a more useful way to use it.

Firstly, I have mapped the peaks that break the "extreme bull" threshold on a chart of the SPX.

Notice this immediately proves my point.

Although "Extreme Bull" spikes correlate to selloffs, they do not necessarily indicate certain selloffs.

We should not use it as buy/sell signals.

HOWEVER

I believe there is actually a more legitimate way to use this.

By applying simple divergence theory.

That is to say, the selloff point is not the point at which bullish sentiment breaks the extreme-reading thresholds (or roofs at 10/10), but rather, the selloffs occur at the point at which price breaks the previous high, on a far reduced bullish reading.


Which of course, in real terms, suggests that price has accelerated even though investor sentiment is declining.

I noticed as well, that if we chart the really big divergences that led to generational crises on the SPX, there is something of a correlation - suggesting that declining RSI is indeed linked to investor sentiment (an obvious point really).


I wrote this to demystify the investor sentiment indexes as they relate to stock markets. Yes, investor sentiment matters, but don't treat them as timing tools without a proper analysis.