As I last wrote (please see my last post), I am still cautious on the markets and feel (as do a good number of money managers I work with) that stocks are way overbought and we need to see some sort of healthy selloff in the markets. I say "healthy" because stock prices don't move straight up...and when they do for extended periods of time the eventual selloff often times is exaggerated....
Investor sentiment swings from optimism and pessimism -- and is easy to calculate given numerous investor surveys.
But, as I have often mentioned, the crowd usually outsmarts the remnants, so a trend of optimism or pessimism may continue for a while.
That said, at the current time the Bull Market in Optimism is intact, and is arguably reaching extremes now. According to most investors, things are just peachy.
1. Per the American Association of Individual Investors (AAII), bearish levels (bearish levels means the number of investors that think the market is due to selloff) reached their lowest since 2005 last week, and fell to 15% for only the ninth time since 2009. Remember 2005-2006 was a bad time for the markets.
2. Readings under 15% have occurred only 5% of the time in the last 45 years.
3. Bears have been under 20% for 28 consecutive weeks -- the second longest streak in history, second only to a 45-week run in the peak year of 1976.
4. Bulls are back up to 58% -- the highest in three years.
For example, in July 2014 82% of the stocks in the S&P 500 Index were trading above their respective 200-day moving averages. Today the market is higher, but only 64% individual issues are above their 200-day lines.
In the Nasdaq in January, 2014 72% of the stocks were above their 200-day moving average, as compared with only 49% today.
Ergo, today the market is at a bullish extreme in investor sentiment, it is undergoing an extended overbought condition and internal divergences have continued.
While I've been cautious for some time now, I have been premature in calling for a possible selloff and correction in stocks...as a coworker mentioned to me the other day, it's tough to fight the tape and right now sitting on the sidelines or betting against the markets is not an easy thing to be doing...eventually however, and I believe soon, we will see a selloff and being cautious will pay off. In the meantime, like riding a horse, I'm going to hold on to my core investment positions until I feel it's time to get off the horse before it bucks.
