Strong Stocks Spook Bulls

3/11/2013


Bullish sentiment has ebbed in recent weeks, with both newsletter editors and individual investors concerned by the market's strong start to 2013.

Among newsletter editors, bullishness dipped to 44% for the week ended March 6 from 55% at the start of February, according to Investors Intelligence. In an effort to determine what those percentages mean, we reviewed market performance after weekly sentiment readings over the last 12 years. In the 617 rolling three-month periods since February 6, 2001, the S&P 500 Index has risen 60% of the time, managing gains of more than 5% in 30% of the periods.

Since February 2001, when the percentage of newsletter bulls fell within the range of 40% to 45%, the S&P 500 went on to post a three-month gain 69% of the time, ahead of the long-run trend. Upward moves of more than 5% were also more common, occurring 42% of the time. As shown in the table below, when the herd of bulls thinned to below 45%, the index was more likely to rise over the next three months and also more likely to post a significant gain.

BULLS ON PARADE
The bullish camp claims 44% of newsletter editors but just 28% of individual investors. Below, we show how the S&P 500 performed in the three months after times when bullish sentiment fell within the various ranges over the last 12 years. The index was more likely to rise 5% or more after periods of low bullishness than after periods of high bullishness.
No. Of
Periods
% Up
% Down
% Up
More
Than 5%
% Down
More
Than 5%
Newsletter Editor Bullishness (Weekly)
Below 25%
4
0
100
0
75
25% - 30%
15
53
47
47
47
30% - 35%
24
71
29
50
17
35% - 40%
72
67
33
44
24
40% - 45%
115
69
31
42
14
45% - 50%
144
53
47
33
19
50% - 55%
139
51
49
14
22
55% - 60%
92
71
29
22
4
60% - 65%
12
42
58
0
17
Total
617
60
40
30
18
Source: Investors Intelligence.
Individual Investor Bullishness (Weekly)
Below 20%
3
67
33
67
0
20% - 25%
25
80
20
52
16
25% - 30%
62
56
44
31
29
30% - 35%
105
63
37
38
20
35% - 40%
122
52
48
29
17
40% - 45%
109
56
44
26
19
45% - 50%
79
63
37
27
16
50% - 55%
51
67
33
27
22
55% - 60%
35
57
43
20
3
60% - 65%
19
74
26
26
5
65% - 70%
6
50
50
17
0
Above 70%
1
100
0
100
0
Total
617
60
40
30
18
Source: American Association of Individual Investors.

Meanwhile, the percentage of bullish individual investors has fallen by nearly 20 percentage points in the past four weeks to 28%, according to the American Association of Individual Investors. That marks the steepest four-week decline since Feb. 5, 2009. After times when AAII bullishness was 35% or lower, the index managed three-month gains above 5% nearly 38% of the time, well above the long-run rate of 30%.

Even with the Dow Jones Industrial Average rallying to a record high, bullish sentiment has ebbed in recent weeks for newsletter editors and individual investors. The sudden interest in stocks by the mainstream media also leaves some wondering if public awareness is peaking.

While historical trends have value, they can't replace careful analysis of the economic landscape. Executives at U.S. businesses appear less optimistic than either newsletter editors or individual investors. In early February, the ratio of insider selling to buying reached its highest level since July 2011.

Entering 2013, the consensus called for 4% higher per-share profits from the S&P 500 Index in the March quarter. Today, estimated growth is just 1%, as companies temper near-term expectations. Yet profits are still projected to rise 9% for the year, supported by double-digit growth in the second half of 2013.

Investors should view back-loaded forecasts with a healthy dose of skepticism. Is there a compelling reason to expect a strong surge in corporate profits later this year? Europe could finally show signs of a meaningful recovery, while U.S. companies may face easier comparisons in the upcoming September and December quarters, given last year's fiscal-cliff concerns. Continued improvements in the labor and housing markets could drive consumers to up their spending. Of course, the effects of government cutbacks could also increase in the latter half of the year. 

For now, though, the market seems to be taking cost cuts in stride. "The so-called sequestration cuts are not as deep as the politicians wish you to believe," says the Jennet Investment Letter. "Earnings, not the Fed and not some glacial movement of money from the bond market to the stock market, will power the next leg of this bull market."


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com