HOW HIGH IS THE “WALL OF WORRY”?
It’s been a while since I reviewed the “Wall of Worry” indicator (see here for more info) so now is as appropriate a time as ever. Although the market rally has continued in 2010 we continue to see a great deal of skepticism in markets. This indicator takes the inverse summation of a broad set of LONG-TERM indicators that track consumer sentiment, business sentiment and investor sentiment. This is vastly different than many of the short-term indicators I often discuss – most of which are pointing to severe excessive bullishness right now (see here & here).
As you can see in the chart below the “wall of worry” has peaked at levels over 90 in accordance with major long-term market bottoms. In March of 2009 it peaked at 93.5 and in June 2010 it actually surged back near those levels with a reading of 92.13. Although the equity markets have rallied over 80% the skepticism of a real economic recovery and sustainable market rally has remained extremely high.
As of Friday’s close the “wall of worry” is at 84.33. This is just shy of the highs and well off levels that are consistent with euphoria. During the tech boom when complacency was extraordinarily high the indicator bottomed in the high 40′s. During the less euphoric housing boom the indicator bottomed at 65. Either way, it’s safe to say we’re well off those levels. Based on this metric it’s clear that the “wall of worry” remains quite high and that could be a long-term positive for the equity markets.
interesting indicator: ” inverse summation of a broad set of LONG-TERM indicators that track consumer sentiment, business sentiment and investor sentiment. ”
looks like being sentiment contrarian has been the way to go.
thanks
Hm, I thought only consumer sentiment is low, business and investor sentiment is high…
So are you increasingly turning bullish?
Great indicator.
TPC,
Let me posit a hypothesis for you and see what you think. The drastic drop we saw from Jan-March 2009 was completely unnatural and represented massive hedge fund liquidation to ridiculous levels.
Thus, back up the drop from there, i.e., what was the yearly close on 2008, and then compare the levels from that close to current levels. Imho, that is how far the market has gone, which is not nearly as impressive as from March 2009 lows.
I think a lot of people, therefore, have their indicators/expectations wrong. But that is neither here nor there, I would just hope to avoid total market collapse going into 2011!!
Yeah, but it really happened. That fear really did exist. It might have been totally irrational, but that’s what happens in a fear filled market. Irrational things.
I got you. But what I am saying is that too many analysts are trying to apply fundamental principles to things that were irrational, i.e., the March 2009 levels.
If we take a more somber view of the market, and exclude that irrational period, I think we are fairly on track. But yeah, I know it happened, so of course that very large deviation is going to be included in all models/percentages/thinking.
I tend to have a little trouble with this description. Yes there was much fear, but someone was still buying… valuations based on the earnings we actually had never got cheap. In hindsight the irrational part as I see it was not anticipating the V-shaped recovery in earnings that would quickly come (helped along no doubt by bank accounting forbearance).
another super bull note by jeffrey “all is clear”saut
The “Wall of Worry” for Gold investors must be getting very low.
I think that this recession as created more of a Wall of Distrust than a Wall of Worry.