BULLISH SENTIMENT HITS 2.5 YEAR HIGH

The bulls are officially on parade.  It’s all blue skies from here.  QE2 has saved the economy and the USA is set for another epic stock market rally that will involve no downside.  At least that’s the sentiment expressed by the most recent small investor survey.  Of course, these are the same investors whose sentiment was near an all-time low just 7 weeks ago with a bullish reading of 20.7% and an S&P 500 that was almost 15% lower. The latest AAII sentiment survey showed a 2.5 year high in bullish sentiment at 51.6%.  This is the highest reading since May 8th, 2008 and just shy of the all-time high in the S&P 500.  Of course, the ensuing few months were followed by a now legendary collapse in the markets.

The Investor’s Intelligence survey also rose on the week, however, the move was less pronounced than the small investor sentiment survey.  Bullish sentiment rose to 51.6% this week from 49.6% – a high reading, but not excessive:

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Captain America

    BUY THE DIP!!!!!!!!

  • Oroboros

    Run Bull, Run!

  • Captain America

    WE JUST DIPPED! BUY THE DIP!!!

  • Captain America

    Honestly TPC, this market feels like it HAS to go to 1200. The momentum is so strong.

  • Shlomo

    TPC,
    2 comments
    1. In my opinion, it is a mistake to take the AAII survey by itself. A look at the equity put/call ratio shows excessive bearishness. This is in sharp contrast to April, where the put/call ratio reached real lows and the VIX reached complacency levels. Also, continued equity fund outflows can’t be called excessive optimism…
    2. The studies of POMO that you did ignore, IMHO, days like today and Tueday. Futures start down 0.5% and the day closes green. We saw these types of days all throughout the previous rally (remember the omnipresent “Stick save”). So the day’s gain may be negligible, but there is an everpresent bid under the market not captured in the end result. Shorter emptor!

  • http://www.pragcap.com TPC

    Good comments. All true. I particularly like that you point out how there is really no such thing as fund flows. There is, however, a high correlation with positive fund flows and negative future returns.

    I know I am fighting the Fed and the yes, the bid under this market feels incredible. I can’t tell you how many times I have seen this market sink lower only to rally at the end of the day. Looks like today is turning out no differently. No selling is allowed to persist. It’s quite amazing really.

    But I am managing it accordingly. Fully prepared to see 1220 or higher on the S&P before a major reversal occurs….

  • Shlomo

    TPC,
    If I have your attention, I wanted to make a few more comments
    1. This is, hands down, the best financial blog on the net. I read every single post (by you) cover to cover.
    2. You have beaten the bush for a while about dollar strength and the foolishness of the inflationistas. I wanted to add a personal touch. I live in Israel. Up until 2-3 years ago, ALL apartment prices and rents were quoted in dollars. Dollars were king. There was a very large black market for foreign exchange in which you could change dollars for local currency for an above-market rate. There was simply great, elastic demand. Recently, all of that has changed. Prices are quoted in local currency. Dollars are no longer in such demand. A local joke tells that when they decided to mint a new 2-shekel coin, they wanted to nickname it the dollar (the current rate is 3.6 = $1). I know that the same is true in Egypt. 10-15 years ago, the unofficial official currency was the greenback, but that is much less true today. In short, the dollar seems to hold its value due to the confidence in it as a store of value. The marginal increases in holdings by the Chinese could be dwarfed by the slow realization by everyone outside the US (and inside) that holding savings in dollars is no longer so safe. This could lead to a real implosion.
    3. The head of the Bank of Israel is Ben Bernanke’s (academic) mentor, Stanley Fisher. Fisher has been fighting tooth and nail to keep the local currency weak against the dollar, buying up over 50 BILLION dollars in the last couple of years, and showing no sign of stopping. It doesn’t seem to be working. The local market is at an all-time high, but as an export-based economy, the economy will begin to suffer from this sooner rather than later. I can guess that this is similar in all of the developing countries: the growth rates are very high and will continue to be. But, much of the growth is export based (or outsourcing work from the West, which is equivalent). The simultaneous explosion in the monetary base of all of these previously (relatively) fiscally responsible countries to fight dollar devaluation has the real potential to create hyperinflation.
    Thanks, and keep up the good work!

  • http://www.pragcap.com TPC

    Shlomo,

    Thanks for the compliments. I am happy to help.

    I’ll have to write a longer post regarding your comments. The domestic deflation & international inflation could be the most important story in the coming years. Particularly in China. I’ll whip something together hopefully for next week.

    Best,

    Cullen

  • John Mc

    Shlomo — where are you getting your put/call information? I see an equity put call ration of .65 from CBOE data. That’s a lot more bullish than bearish. Are you looking at other data?

  • John Mc

    Let me revise — .68 is not exactly bullish, but it’s not bearish either, and it’s been coming down as the market’s been rallying. I’m just wondering if I’m looking at different data than you.