Charles, I know as vice president of the American Association of Individual Investors, you follow a survey. Can you tell me about that survey?
Sure. We ask the members every week about their sentiment towardthe stock market. Specifically, we ask if they think stocks are going to rise or fall over the next six months—rising being bullish, bearish being that stocks will fall. We’ve asked the survey weekly since 1987.
Is there any type of historical correlation to the market performance?
There is. We’ve found a correlation when the ratings have reached extremes. For instance, in March 2009—right as the bear market was hitting a bottom—we saw bearish sentiment exceed 70%. Similarly, if we go back to the end of the tech bubble in January 2000, we saw bullish sentiment rise about 70%.
So, when we start seeing these bullish and bearish sentiment readings really get out to extreme levels, it usually is a sign that the market is about to make a reversal. Either if it’s going up, it’s going to turn around and go back down, or if it’s been falling and we see bearish sentiment hit an extreme, it means stocks should probably rise in the future.
So it’s kind of a contrarian indicator.
It is a contrarian indicator, and it works best actually when we do see those readings reach extremes. Over shorter periods of time, we do see sentiment varying one way or another, but it does give us a pretty good sense of how individual investors feel about the markets.
And a reading right in the middle—does that mean we’re in just a trading range where the investors really don’t know what’s going on?
Precisely, and a lot of times it gets affected week by week depending on the headlines, depending on the news out there, and just on investors’ moods.
So over the short term, we do see a bit of noise, but it does again signal what investors’ moods are, and sometimes they can fluctuate depending on the markets and depending on the economy and the depending on earnings news.
What’s the current sentiment survey saying?
Right now, we’re seeing bullish and bearish sentiment about even, but what it doesn’t tell you is that we’ve seen bearish sentiment stay above average for 32 out of the last 35 weeks and we’ve seen bullish sentiment be below average for most of the last 27 weeks.
So, although we actually have seen bearish sentiment pull back recently, investors are still very cautious. They’re worried about the economy, they’re worried about Washington DC, and obviously the politics that aren’t working, and they’re concerned about the European debt situation.
So they’re factoring all of that in, and just sitting and waiting like everyone else.
They are…and it’s interesting. Last week, I asked members whether or not they were bargain hunting for stocks or waiting, and the majority of members actually said that they either had started bargain hunting or they were actually waiting. And a lot of members said they were looking for another 10% to 20% drop in stock prices before they thought prices would be at a deep enough value to warrant shopping for them.
Are they discounting the third-quarter earnings season as old news?
They are. They are actually looking past earnings news and I think they’re really more focused on the headline risk…and I think they’re really worried about the economy and I think a lot of investors are looking at companies.
They’re looking at corporate balance sheets and they’re wondering why they’re not spending them on hiring, why they’re not spending them on capital equipment. They really want to see corporations help out the economy.
But at the same time, I think there is a lot of frustration with Washington, and the feeling that Washington itself isn’t doing enough to spur economic growth.
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