When it comes to market sentiment the nation is violently ambivalent. The unofficial meme of the week has been the idea that markets are in a "bubble" of some sort but no one knows exactly what kind of bubble or where it's located.
Investors are passionately confused, which is usually when people start getting hurt. In the attached clip, Bespoke's Paul Hickey applies actual data to try to make the noise somewhat useful.
A Crash in Newsletter Bears
In terms of sentiment, the group of pundits complaining about bubbles sees the least risk on the horizon. "The major polls of sentiment we look at newsletter writers and institutional investors show extremely low levels of bearishness," notes Hickey. Fewer than 16% of the pundit community is bearish, the lowest level Hickey has seen since 1989.
The feedback loop is a mind-bending. Newsletter writers are screaming about bubbles, but wildly apathetic about market risk. Being sheep, the pundits then cite the low levels of bearishness among their peers as evidence supporting their bubble thesis.
Historically speaking, newsletter writers as a collective are no better than a coin-flip when it comes to forecasting the next big move in stocks.
Since 1980, when under 16% of newsletter writers are bearish, the S&P 500 (^GSPC) has been higher by almost 10% on average over the next year. So, it might be best to turn down the volume on your television.
Individual Sentiment Extremely "Meh"
Based on the American Association of Individual Investor survey, Main Street investors have been doing much better than the newsletters this year. Last week when stocks were hitting new highs, individuals were taking some money off the table. For the week, bearishness picked up by about 6% while bullishness dropped the same number. "It's impressive to see they turned more bullish as the market was declining into the government shutdown and now their turning a little less bullish," notes Hickey.
While slightly more bullish than they have been on average during the 5-year bull market, individuals are far less hysterical than people who actualy give advice for a living. On a historical basis, there is nothing remotely resembling "bubble" readings on Main Street.
Last week showed 39.2% bulls and 27.5% bears in the AAII poll. For comparison sake, at the October 2007 high there were 54% bulls and 25% bears. In September of 2000, 62% of those polled were bullish and only 8.3% bears and prior to the October 1987 crash a were 6% of those surveyed by AAII were bearish.
In the context of the bull market since 2009, sentiment is slightly inflated, but hardly extreme. Just check out the sentiment graphic below.
The future is promised to no one, but Hickey is having a hard time seeing euphoria. "We like to take things one step at a time but in the next 3 to 6 months we're certainly positive about stocks," he says.
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