Goldman Sachs is warning that investors might be too bullish. In a note to clients on Monday, Goldman equity chief David Kostin notes that the firm’s sentiment indicator is at 100, the highest possible reading for the measure. As Kostin writes:
Our Sentiment Indicator currently stands at a maximum possible reading of 100, suggesting the S&P 500 has near-term downside risk during the next six weeks. The prior week’s reading also equaled 100. An extreme positive reading (above 90) suggests the S&P 500 has a high probability of falling by roughly 3% during the following six weeks. The SI ranges from 0 to 100, with readings below 10 suggesting low positioning, and readings above 90 offering a warning sign that professional investors may be unduly bullish. Extreme positioning is a strong contrarian signal for subsequent equity performance. Note that Goldman Sachs has one of the most conservative S&P forecasts for 2015, expecting the index to rise to 2,100, with the index returning 4% including dividends this year. Here’s Goldman’s chart showing the declines in stocks after the sentiment reading hit 100.