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Thursday, 11 November 2010

Bullish Sentiment Creeps Up

Andrew Bond

Since the beginning of September, the bulls have been in charge of the U.S. stock market. The incredible run, fueled by improving economic data, strong earnings reports, and another round of quantitative easing, has sent the S&P 500 soaring by more than 16%, only to be outdone by the Nasdaq's 22% gain as of Monday's close.

The rally has also been broad based as leaders from many different sectors have advanced substantially. Since the end of August, Apple has increased by 31%, ExxonMobil is up 19%, and Goldman Sachs has run up by nearly 24%.

However, bears looking for a ray of light may want to look at the recent American Association of Individual Investors (AAII) sentiment survey. The survey purports to measure the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months.

On Oct. 29, the survey reached a two year high in terms of bullish sentiment, as 51.2% of the respondents said that more upside is to come. The survey had not seen a reading this high since it reached 53.3% in early 2008. In addition, only 21.6% of those surveyed reported that they were bearish. This is the lowest percentage of bears since January 2006. In last week's survey, bullish sentiment was down slightly to 48.2%, but the survey was conducted before the huge market rally last Thursday.

The good news for the bears is this survey tends to be a contrary indicator for market direction. For example, on March 5, 2009, sentiment had reached record extremes of the financial crisis. Bearish sentiment reached 70%, while only 18.9% of investors were bullish. In hindsight, that week marked the bottom, from which the S&P 500 has now advanced more than 80%.

Bullish sentiment highs were reached this year in April, just before the sovereign debt crisis and "Flash Crash" sent the markets into a spiral.

Does this mean the top is in? Not necessarily, but investors should be mindful of extremes of any kind in the market and recognize that no one has ever lost a dime taking profits in stocks that have had a good run. Sure, you may miss some additional alpha, but there are always opportunities to find new winners. So get your powder ready.

Andrew Bond owns no shares in the companies listed. Apple is a Motley Fool Stock Advisor pick. The Fool owns shares of Apple and ExxonMobil. Try any of our Foolish newsletters today, free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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