Stocks hit by the summertime blues

Jeff Macke Yahoo Finance

Stocks are getting smacked around this morning on weak economic news out of Europe and Asia. Combined with earnings fear and the general consensus that investors are too complacent and you've got a stock market down 1% early and still way above support.

At 1960 the S&P 500 (^GSPC) is still less than 2% off record highs made just last week but it probably feels worse than that to casual investors. That's because the S&P hasn't had a 1% loss on a closing basis in almost 3 full months. When everyone leans to the same side of the row boat it gets pretty unstable. Forget the volatility index (^VIX) or "fear gauge," which is still near all time lows. The way I like to measure mood is by watching shifts in the American Association of Individual Investor's sentiment survey.

AAII polls individual investors and simply asking whether they're bullish, neutral or bearish. The poll this morning shows 37.6% bulls, 33% neutral and 30% bears. Those numbers are about in line with the long term average levels for the poll. What's interesting is the huge shift we saw over the last week from neutral to bearish. The number of self-described bears rose by nearly 1/3 in the last 6 days. In other words, it didn't take much to convince investors to bet against the stock market.

The last time there was such a dramatic uptick in the bears was between April 3rd and 10th after the S&P dropped almost 4%. Stocks bottomed the next day and from April 11th through last Thursday they rallied almost 10%.

I'm not saying the stock market is a coiled spring ready to spring higher but I like it when there are a lot of skeptics out there. Too many people are confusing boredom with complacency when it comes to stocks. Just because day trading is out of fashion and volatility is low doesn't mean investors are too optimistic. Moods don't swing this fast unless the masses are sensing risk.

So where do we bottom? Predictions are useless but on a chart basis we've got nice Big Round Number support at about S&P 1900. That would be a nearly 5% pullback and a nice entry point. Based on how twitchy everyone seems it will also be a point at which we can expect riots. That's a market I want to buy.

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