Can This Rally Be Trusted To Continue?

Joe Bell talks about trader sentiment and why traders doubt this rally will last much longer-which is why it probably will.

My guest today is Joe Bell from Schaeffer's Investment Research, and we're talking about trader sentiment and where it is here these days.  Joe, we're coming into the end of 2012 here and some people are skeptical of this rally.  What's the sentiment out there of traders?

Well, that's exactly right.  Very skeptical, and that's what we're seeing.  It's been, obviously, we've had a lot of strong price action, just breaking out to multi-year highs, a lot of quantitative easing that's been the big topic, but beneath that you've got a lot of people doubting this market, and historically market tops occur when you have optimism and euphoria, and we're just not seeing that right now.

So, the idea would be then even if they don't understand why it continues to go higher, they should probably just follow that trend?

Yeah, well, from our perspective, we're going to evaluate that sentiment.  At this point we've got, since March 2009, we've had almost a trillion dollars put into bond funds, and almost $350 billion dollars taken out of equity funds.  To us, that just tells us the retail trader is perhaps on the sidelines and not a lot of people are buying into this market, and from a contrarian point of view, that tells us a lot of sideline money could perhaps be put to work at some time in the future. 

All right, so do you see this market going higher because you use sentiment as a contrarian indicator?

Absolutely.  Any time the market is all about expectations, obviously, it's a forward-looking mechanism, and whenever you have low expectations in the face of very strong price action, we think that's a very bullish scenario for the market overall.

All right, what do you think is going to affect the markets most here as we come into the end of 2012?

Obviously, you've got the elections coming up, and so a lot of focus is going to be on that.  QE3 of the markets, we're talking a lot about that, and we've recently had Bernanke come out and give them that, and we've had a strong reaction so far, so probably the elections and QE3 overall, but like I said, one of the big things that we're looking at also is hedge funds are-perhaps the retail traders out of this market-and hedge funds have been somewhat dominant, and if you look at their performance so far this year, actually have underperformed the market quite significantly, so we view them as quite underexposed and perhaps that'll be the fuel that could perhaps come into this rally late in this year and push us higher.

What do you think is going to be the thing that gets them to take this money off the sidelines and get into this?

Well, if you're referring to the retail trader, that could be a longer-term scenario, I think.  Historically, like I said, market tops don't happen until we get a lot of euphoria and that retail trailer back into the market.  Intermediate term the rest of the year, perhaps we're not going to see them come in, but I think we've seen a lot of the. we look at a lot of data related to hedges for hedge funds, and we're seeing that start to pick up the last several months, although they've underperformed during 2012, we think we've seen some activity that perhaps they're going to start accumulating, so for at least 2012, we're thinking the hedge fund could perhaps be that extra fuel for the end of the year.

All right, is sentiment telling you anything about who they think might win this election?

At this point, no.  I mean, we're not seeing, right now obviously like a balanced out sort of. we're inching ahead as far as the political polls, but, yeah, I don't get too much into the sentiment of the politics itself, but more of the sentiment towards the overall market.

All right, and finally, where do you think the best opportunities are then if someone is going to get into this, and money is going to come off the sidelines and try to get in front of that money.  Where do you think it's going to go?

Absolutely.  In general, I think, a lot of the sectors that perhaps have the most negative sentiment is going to be home builders and retail names, consumer discretionary.  We've heard a lot about a lot of people doubting the home builders and consumer discretionary.  We've heard all year the consumer is dead, and yet a lot of these names are near all-time highs and performing quite well.