Sentiment still seems to largely favor the idea that we are working through a garden variety bull market correction. Of course, price action is what matters most, and sooner or later the bulls are going to probably need some more participation from the energy/materials complex. The psychology is in place, and all the bulls need is a little oomph to get going again.
Below, you will find J.C. Parets’ latest piece over at his AllStarCharts.com blog, titled “Where Did All The Bulls Go?” I have linked to him before, and I think he does an excellent job fusing these sentiment surveys with technicals.
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The greatest trick the Bull Market ever pulled was convincing the world it didn’t exist.
Here we are three years into this bull market in stocks and the bulls are non-existent. Literally. With the S&P500 just 2% away from new 52-week highs, this week’s sentiment survey shows the least amount of bulls since September of last year.
Do you remember what happened after September of last year? Stocks exploded higher for the next six months = 30% for the S&P500 & 40% for the Russell2000.Will that happen again? I guess we’ll see. But I do know this much: there’s a much higher likelihood that a new rally can get going with the current lack of bulls as opposed to an environment where everyone is already bullish.
Here are the latest survey results:
And like we’ve been saying, I think the catalyst will have to be the rotation into more offensive sectors. Bank of America/Merrill Technician Mary Ann Bartels told Bloomberg this morning:
“Stocks driven by the economy, including materials, energy and industrial shares, have fallen out of favor, pointing to a potential “deeper pullback” for the U.S. equity market, she said.
“The market is still staying away from commodity-sensitive cyclicals,” Bartels said. “As long as that continues, that means the market is more likely to go down.”
I couldn’t agree more. We discussed this earlier in the week and I think it’s something important to watch. A good friend of mine recently called me a “Rotationista“. I hadn’t heard that before, but I’ll take that as a compliment I suppose. I do want to see rotation into some of these areas: Energy, Materials, and Industrials. And it feels like everyone hates these sectors. So just like the sentiment surveys, we’ll put our contrarian hats on and look at this lack of confidence as a good thing.
What do you guys think?
Sources:
AAII Investor Sentiment Survey (4/25/12 AAII)
Bullish Sentiment Drops to Lowest Levels Since September (Bespoke)
Bartels Sees S&P at Risk for 10% Drop (Bloomberg)
HuggieBear is bullish tharefore I am bullish.
LOL, Hug the Huggie Bear.
No critcism intended BTW. He seems to be a pretty good trader.
This is interesting in that sentiment is usually just an indication of what just happened in the markets e.g. if it went up, bullish.
But in this case, the markets have been going up and sentiment is bearish anyway. Perhaps that is because of the constant barrage of not so good news on the economy.
However, I have read that, historically, markets bottom before the economy bottoms, and then keep on going up.
Hard to tell here, but if the economy (housing, manufacturing etc.) is in the process of recovering now, then long term stock holders should stay put. Of course, in and out trader types still would navigate pullbacks within an uptrend, such as the one now. As you say, Chess, it is unclear whether this pullback is over or not yet. Maybe by next week we get more indication of that.
I don’t pay attention to sentiment indicators any longer. I used to be very active in a local AAII chapter’s special Interest group. The vast majority were excellent traders, not the type I would want to fade. The only sentiment indicator the “regulars” would use, was the market might be near a top when the room was Standing room only. I believe the AAII survey is still a self selected “go online and vote” and not a random sample.