Bulls Creeping, Not Charging


Last week, bullish sentiment increased for both individual investors and newsletter editors, ending a string of multiple weeks when bears outnumbered bulls. That shift in sentiment highlighted trends every investor should know:

• According to Investors Intelligence, bearish newsletters outnumbered bullish newsletters for seven consecutive weeks before last week. The last time bearish editors outnumbered bulls for seven straight weeks was 2009.

• The American Association of Individual Investors survey found bears outnumbered bulls for 11 consecutive weeks before last week, a streak not seen since the summer of 2012. AAII data tends to be more volatile than Investors Intelligence numbers.

• Even after the move into majority bullish territory, sentiment remains more pessimistic than usual. In the individual-investors survey, bulls outnumbers bears by a ratio of 1.09-to-1; in the last 20 years, the bull/bear ratio has been that low 35% of the time. Newsletter data paints a far starker picture, with the bull/bear ratio of 1.11-to-1 lower than all but 13% of readings over the last 20 years.

Investors and newsletter editors reluctant to miss out on more gains may have deployed some cash into the market, but we can't assume the problems have evaporated. Over the last three weeks, the S&P 500 Index rose 3.2%, and the Dow Industrials and Transports gained enough ground to qualify as significant rallies with regards to the Dow Theory. However, we're several steps away from a bull-market signal. And while Investors Intelligence sees today's sentiment levels as positive for the market, "a strong long-term buy is not yet clear."

Not surprisingly, investor sentiment has historically been somewhat correlated with the value of the S&P 500 index. Both rises in stock prices and high values for major stock indexes tend to inspire optimism. According to The Option Strategist Hotline, "The bulls scored a major victory . . . We have often compared this year's market with that of early 2008, and this action is right in line with what happened then."

The Sadoff team's Market Trends argues that stocks' weakness early this year represented an overreaction to external forces. The newsletter maintains fears of recession are overblown. "Overall our economy is sputtering. Yet consumer spending remains steady within a 2.4% growth band. Auto sales are healthy and housing is buoyant. Most often auto sales and housing weaken in advance of a recession."

We at the Forecasts cannot rule out a recession, but do not expect one. U.S. gross domestic product rose 2.4% last year, and the Blue Chip Economic Indicators consensus projects a 2.1% rise this year. Nothing impressive, but far from panic time.

We are far from the only analysts avoiding extremes of sentiment despite the market's volatility. This story closes with an excerpt from David Jennet's Investment Letter, which has charted a course down the middle, between the bulls and the bears. "Fortunately, I do not need to know where stocks will be a week or even a month from now. I am confident that the conventional wisdom about a coming recession will be proven spectacularly wrong. Because I believe this, I see no reason to be a seller in this market . . . my advice is to stay invested and ignore those who want you to prepare for the end of the world."

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