BULLISH SENTIMENT REMAINS VERY HIGH

Sentiment readings remain at elevated levels this week as the market remains near the highs of the year and investors continue to believe that stocks have only one direction to go – higher.

According to the AAII sentiment survey bullish sentiment rebounded to 47.4%.   All it took was a brief -3.5% decline in the S&P 500 to scare small investors last week and then a brief rebound was enough to make them confident again.  Charles Rotblut of AAII details the results:

“Bullish sentiment, expectations that stock prices will rise over the next six months, rose 7.4 percentage points to 47.4%. This was the 12th consecutive week that bullish sentiment has been above its historical average of 39%.

Neutral sentiment, expectations that stock prices will remain essentially flat over the next six months, edged up 0.4 percentage points to 27.9%. This was the 16th consecutive week that neutral sentiment has been below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 7.8 percentage points to 24.7%. This is a four-week low for bearish sentiment. The historical average is 30%.”


This week’s Investor’s Intelligence survey saw a modest decline in bullish sentiment to 55.7%.  This remains very high in historical terms.

All in all, investors remain convinced that the stock market simply cannot decline and the persistent buy the dip phenomenon that we’ve seen in recent months is a clear sign that portfolio managers are eager to snatch up stocks into year-end.  A sustained bear decline might not occur until 2011.

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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  • boatman

    just couldn’t drink the cool-aid in august……i would not have slept a nite.

    gold almost made up for it,however.

  • Mountaineer

    Great article from Krugman you might want to post, similar in tone to your “Time for the Irish People to Rise” work from a few weeks ago. Highly recommended to all.

    http://www.nytimes.com/2010/11/26/opinion/26krugman.html

  • anonymoose

    great rebuttal to krugman:

    http://krugman-in-wonderland.blogspot.com/

  • domingo

    My humble opinion: the bearish stance in the sentiments readings in August was a BUY OPORTUNITY. The current bullishness means= SELL WHAT YOU BUY IN AUGUST AND WAIT. The crowd IS BAD COMPANY.

  • http://wohlnerfinancial.blogspot.com/ Roger Wohlner

    As I understand it this survey was conducted among AAII members. I wonder how correlated their sentiment is with the investing public as a whole? It will be interesting to watch what unfolds in the stock market over the next few months.

  • http://mercenarytrader.com Jack Sparrow

    “A sustained bear decline might not occur until 2011.”

    Really?

    Current strength is almost entirely centered on the U.S. consumer. Everywhere else, there is weakness. Look at copper (JJC)… oil (USO)… China (FXI, PGJ)… Emerging markets (EEM)… S&P (SPY) looking out of gas too… and last but not least look at the $USD, which is the “risk-off” fulcrum against which all “risk-on” opportunities are implicitly leveraged.

    Treasuries appear tapped out in spite of Fed purchases, Spain is looking like the next incarnation of Lehman Brothers, China is entering a hiking cycle, evidence of a housing double dip is mounting, the technicals are deteriorating rapidly everywhere except consumer retail… and so once again the last best hope comes down to the U.S. consumer following his or her Pavlovian urge. Now is not the time to situate for sunshine.

  • http://www.pragcap.com TPC

    Don’t get me wrong Jack. I am in the anti QE2 trade. I am not long stocks by any means. But I have covered my equity shorts. The better ways to play the downside have been via dollar longs and commodity shorts. That’s the true anti QE2/inflation trade.

    The key opportunity in recent weeks has been understanding that QE is in no way inflationary and that the run-up in many asset classes, the decline in bonds, the decline in the USD were all irrational.

    http://pragcap.com/unraveling-qe-trade

  • http://mercenarytrader.com Jack Sparrow

    Well, can’t really argue there… we’ve been long $USD for some time, plus short commodities and China ever since the post-QE2 reversal — adding to that with base metal miners earlier this week… perspective being this is as much about “gray swans” as buy the rumor / sell the news, re, QE2.

  • Oroboros

    Did somebody here recently wonder what the avg home loan term-to-maturity was?

    If so …

    http://www.clevelandfed.org/research/trends/2010/1210/01finmar.cfm

    “In June, 2007, the term to maturity of all loans closed was 29.5 years; however, as of September of the term to maturity of all loans closed was 27.6 years.” (charts and such at the link)

    And now back to your regularly scheduled post.

  • prescient11

    Why oh why would anyone be short commodities, ESPECIALLY base metals, except for a very short play?? I will be very interested to hear that question.

  • SS

    Uh, commodities are getting crushed in recent weeks.

  • http://jamesgoodeonthemoney.blogspot.com/ OntheMoney

    Why? Because commodities sentiment, as measured by large spec net positions on the CRB, has hit stratospheric levels only seen at previous long term peaks (Jan ’96, Feb ’08). For obvious reasons, the world has come to believe that commodities can only go up.

    Both previous peaks coincided, unsurprisingly, with a major trough in sentiment (and price) on the dollar. Yes, the market signal is deeply contrary to majority investor opinion, but it’s unambiguous: buy the dollar, sell commodities. Just beware another possible head-fake drop in the greenback to lure die-hard bulls back in before the trap finally snaps shut in 2011.

    I’m fully aware of all the fundamental and Fed-related reasons to buy commodities but, unfortunately, so is everyone else. It’s just another case of Bob Farrell’s investing rule no. 9:

    ‘When all the experts and forecasters agree, something else is going to happen’.

  • roger erickson

    euphoria here in DC is beyond belief

    “money from any additional common stock sales would go straight to the Treasury”; [oh, be still my beating heart!!]

    I smell an inside rat (one that’s already dead anyway)

    Banks buy GM shares, making IPO largest ever Washington Post
    http://www.washingtonpost.com/wp-dyn/content/article/2010/11/26/AR2010112605018.html

    besides all this talk about “paying back” the Treasury, and “taxpayers getting their $ back”
    there’s euphoria over banks buying stock in what’s essentially a gov corp?

    we’re supposed to cheer aristocrats buying peasants with public currency? that is, when they’re not bypassing them altogether?

  • Mr. Dividend

    The sentiment readings are very clear.

    Timing is always the real frustration.

  • Roger Ingalls

    Hey thanks!

    Most interesting stat from that piece?

    Cash was the number one source of financing for all purchases in Sept 2010, despite record low interest rates.

    Can’t imagine how far back you’d have to look to find that happening before!!

  • Roger Ingalls

    Also to support the trend towards shorter loan terms:

    1. The banks have increased the incentive to take a 20, 15 or 10 yr term. The difference between a 30 and 15 3 yrs ago was typically 0.25 to rate, now it is typically 0.5 to rate.

    2. The very low rates make it possible to refi from a 30 to a 15 often with only a small increase to payment.

    I am surprised the average is that high still. I was thinking closer to 25yr, with the greater percentage of refis in the mix.

    Lastly the chart measures payments, so a good portion of the decrease is due to the lowered rates, though there certainly have been a lot of “cash in” refis lately, as folks despair of making any money in equities or bonds.

  • Oroboros

    Glad to help.

    Cash being the #1 method of purchase recently was a surprise. Those smart cash investors had better hope housing doesn’t double dip and stay there, a la Japan.

  • AWF

    Hallucinations Frm the Breakfest Table–The Week-End Update.

    Notes on the FX Markets:

    The $USD, Euro and Yen look to be in a “Destruction Derby”
    While the Emerging Markets look to be a in “Mothers Car Show”

    Lets take a look at a proxy of the $USD = The ETF “UUP”

    The “Short Term” Trend (Daily/Weekly) in UUP has turned UP.

    From Wkly Charts/Data
    Using the ETF “UUP” as a proxy for the $USD–overhead resistance in the 23.50-23.75 Zone–that would be a 7% move UP from its recent wkly low.

    The “consideration” is of a “potential/real” 7%+ move UP in UUP from its Low.
    The Trade has been UUP Down = Stocks Up –If/Then
    A 7% UUP Up Move = 7% S&P Down Move–putting that in perspective from the 1225 S&P High a 7% down move would = 1140 on the S&P.

    A perspective on the “Short-Term” Trend

    Is the S&P Piercing/Surging to New Highs
    Or Plunging/Testing New Lows–?

    History records that Markets “take a pause” after Thanksgiving

    Politics: can you say “Capital Gains Tax”

    International Events: Nothing like a Thanksgiving “Shelling” to cheer things up

    Lets not forget those “Crazy” Europeans – another bailout just in time for “Christmas” shopping.

    All in All—You won’t find this receipe at the “Grocery Store”

    Updates on the Confidence Ratios.

    GLD/UUP = Prefers GLD–Hey “Boatman” -Eyes Wide- a strong Dollar might lead to a shake out in GLD– But old man River/Gold should keep rolling along.

    Commodities/UUP = REAP profits in DBA and DBC

    Bond/Bond Confidence = prefers High Yield BUT BUT BUT Investors are moving away from both the LT Treasury and High Yield Bonds–Stay away

    Where is Money Moving?

    I have posted many many times before = MID Cap & Small Cap Stocks! Exmp = IJR for an ETF

    Choices could be Small/Midcap Stocks with strong “Relative Strength” and low exposure to international events–The “Home Grown” varieties.

    Thats all Folks

  • roger erickson

    then, according to Bob Farrell, the logical move is to SJH, not IJR

  • AWF

    A better choice might be REW on a close above 17.25– of course if you are going to take a risk then take one!
    SJH–Shorting value ? That’s not in my universe,

  • http://mercenarytrader.com Jack Sparrow