Not Enough Of Us Are Worried
We understand if you're feeling good about the stock market.
So far this year, the S&P 500 Index is up 12.2% excluding dividends, with nine of 10 sectors in positive territory. Since Oct. 10, a period that encompasses September-quarter earnings season, the index has gained 8.4%, suggesting optimism about results.
In such an environment, the enthusiasm can be contagious.
As of Dec. 2, 53.4% of investment newsletters were bullish, the fifth consecutive week above 50%, according to Investors Intelligence. Over the last 25 years, bullishness has averaged 46%. Investors Intelligence considers bullishness above 50% a sign of increasing risk, while readings above 60% — last seen in early July — suggests a market top is approaching. In contrast, bearishness is at 13.9%. To put these sentiment numbers into perspective, consider three facts:
• In the 1,322 weeks since August 1989, bearish sentiment has fallen below 13.9% exactly two times, once last week and once in early September. Six weeks after the September low, the S&P 500 Index had slumped 6%.
• Historically, the S&P 500 Index has averaged returns of just 0.2% in the four weeks after adviser bullishness came in between 50% and 60%. When bullishness topped 60%, the numbers got ugly.
• The spread between the bullish and bearish percentages has narrowed slightly to 39.5%, after three straight weeks above 40%. Investors Intelligence considers spreads above 30% worrisome and those above 40% major red flags. The 39.5% spread is wider than about 97% of the weekly spreads since 1989.
Other measures of sentiment are also optimistic.
Brokerage Charles Schwab's Trading Services Sentiment Survey was 54% bullish as of mid-November, the highest level of bullish sentiment among traders since 2008, when the survey began collecting data.
The latest American Association of Individual Investors survey found 52% of the group's members bullish (meaning they expect stocks to rise over the next six months), well above the long-run average of 39%. Bearish sentiment has dropped to 21%, below the historical norm of 30%.
Investors aren't just claiming to be bullish — they are backing it up with their wallets. The bull/bear ratio for Rydex mutual fund assets has hit its highest point since 2001. Rydex funds allow investors to bet that the market will rise or fall, and today's ratio reflects strongly bullish sentiment.
At the moment, bullishness makes sense. The Forecasts is part of that bullish crowd, and for good reasons.
• The Dow Industrials and Transports broke through to new all-time highs in October, reconfirming the Dow Theory's bullish tack.
• We can still find attractively valued stocks with strong growth potential.
• About three-fourths of S&P 500 Index companies topped third-quarter analyst estimates, above the long-run average of 63%, according to Thomson Reuters. More important, stocks again rallied during earnings season.
• Economic news has been generally positive, including a surprise upward revision to third-quarter economic activity and higher-than-expected consumer sentiment as measured by the University of Michigan.
With skepticism scarce, the chance of a correction increases. In the main, the Forecasts deals with corrections not by selling in anticipation but by reacting promptly and letting stock-specific factors drive decisions. We may sell a few stocks to raise cash. Or we may just stand pat, confident in the knowledge that a diversified portfolio of high-quality stocks is a potent weapon against market weakness.
Gauging our own sentiment
Even when we're bullish, we try not to be bull-headed.
Our Buy List has averaged a 95.9% position in stocks this year (337 days through Dec. 3), with the Long-Term Buy List averaging 93.3%. Neither list dipped below 86% stocks this year, even for a day.
That bullishness has been profitable, as evidenced by our recommended lists' outperformance. So far this year, our Focus List has returned 23.2% including our recommended bond-fund position and 25.3% on a fully invested basis, well above the S&P 500's 14.3% total return. The Buy and Long-Term Buy lists have also trounced the benchmark.
See www.DowTheory.com/performance for returns since 2003.