Just how far has the bullish
sentiment of independent investors recovered since the 2009 bottom? Pretty far indeed.
Below is a chart showing the
cumulative AAII investor sentiment going back to 2006. As you can see, the typical small
investor had a mostly bearish outlook on stocks from late 2007 through the end
of 2009. The small traders
then turned slowly bullish on equities in 2010 and have been increasingly more
enthusiastic about stocks ever since. As
of last week, this indicator made a new multi-year high which shows you just
how much investor sentiment has rebounded. This has caused many to wonder if
investors have become too bullish on stocks.
Yet for all this, the public at
large is still missing from this remarkable rebound. It’s mostly high-net-worth investors
that are the driving force behind this bull market. The general public has exposure mainly
in the form of 401Ks, but gone are the days of day trading and direct
investment. The average
retail investor (i.e. the general public) never quite regained the same
appetite for equities he had in the years prior to the credit crash. Yet high-net-worth investors are as
bullish as they have been in years. So
is the typical Wall Street pro. But
is this enough to put a top on the market (from a contrarian standpoint)?
Consider that in the years since
the 2009 bottom there have been at least three notable corrections: the “flash
crash” in May 2010, the 2011 mini-bear market, and the April-June 2012
correction while the master weekly Kress cycle was bottoming. Each of these setbacks occurred on low
public participation. It’s
clear that the stock market has largely become a rich man’s playground since
the credit crash and Wall Street is basically just playing against itself, not
the public at large. So the
answer to that question is yes, stocks can “correct” substantially even without
widespread public participation.
The next question that comes to
mind is, “But doesn’t history show that major bull markets don’t end until the
public has maximum exposure to stocks?” This
is a true observation, so there is some question as to whether the recovery
that began in 2009 will continue, albeit with fits and starts, after the
60-year cycle bottoms in 2014 and until the public finally embraces the
bull. Quite simply, this is
a matter of speculation and unfortunately technical analysis, with its
short-term focus, offers no conclusive answers. But the odds are still in favor of
2014 witnessing another broad market correction – the first in over a
year.
So while the general public
remains ambivalent toward equities, the current participants – which include
large speculators and institutional investors – are as bullish on stocks as
they’ve been all year. The
CNNMoney Fear & Greed Index is currently at 71, its highest reading since
the September peak. The
AAII bull-bear ratio is currently at a level which in the past has suggested
too much optimism and has heralded market pullbacks (see chart below).
Consider also the current state
of investor sentiment as reflected in Citigroup’s Panic/Euphoria Model. The indicator is currently reflecting
a state of “euphoria,” as defined by Citigroup’s admittedly loose
methodology. The indicator
is not without merit however: it correctly predicted the previous pullbacks of
February, May-June and August.
It must be emphasized that none
of the above mentioned sentiment indicators can pinpoint a market top with any
precision. Rather, they
should be viewed as “heads up” indicators to prepare us for a potential market
juncture in the near future.
