Sunday, December 29, 2013

A look at investor sentiment

The latest spike in the bullish percentage is another in a growing list of evidence that the market is becoming increasingly vulnerable to a correction.

Also keep in mind that according to Investors Intelligence, the percentage of bullish newsletter writers has increased to a 3-year high while the percentage of bears recently hit its lowest reading since prior to the 1987 market crash.  As I wrote in Monday’s report, “A one-sided, bull-dominated stock market is a top-heavy one and is quite vulnerable to unexpectedly bad news.”  After the ebullience of the year-end, end-of-quarter portfolio adjustment inspired rally has subsided, investors are apt to consider the influence that rising rates might have on equities. 

A corrective pullback in January need not put an end to the bull market, however.  A final “melt-up” in the first quarter before volatility significantly increases is still my working scenario entering the New Year.  

The next stock market pullback might be a short-but-sharp affair like the one in November 2010.  A pullback would clear the air and remove some of the speculative excess from stocks in preparation for the final run-up.  [Excerpted from the 12/27/13 issue of Momentum Strategies Report]