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Two More Reasons to Stay Bullish

Taking a closer look at how anecdotal sentiment impacts the market

by 9/20/2012 10:43:59 AM
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Here at Schaeffer's Investment Research, we like to take unique looks at the market to try to figure out why it might move like it does. For instance, when I was on Yahoo! Breakout with Jeff Macke back in late May, I said to look for a surprise summer rally. Fortunately, that has played out nicely. But what really got me thinking that we had plenty of fuel for a big summer rally was just how much hate I received on their message boards. The masses were ready to hang me for noting how low overall sentiment had become, and why that could be bullish with any good news. This is called anecdotal sentiment. It is tough to measure a lot of times, but it is probably one of the better long-term indicators regarding the direction of the stock market. As long as bulls are hated for being bullish in the midst of a huge bull market, stay bullish is my take.

I'll admit, I have some very near-term concerns creeping up. But over the longer term, the bull market is alive and well, and I continue to target a year-end S&P 500 Index (SPX) of 1,525.

Now here are two recent examples of some very negative anecdotal sentiment. Remember, these can be extremely bullish. First off, is a fascinating study just released by Franklin Templeton. In a nut shell, they interviewed 1,000 investors on what the market has done during the past three years. Of course, it's been up those three years, and we're in the midst of a huge bull market. What is amazing is that most investors had no clue!

  • 66% thought SPX was down in 2009.
  • 48% thought SPX was down in 2010.
  • 53% thought SPX down last year.

Now I will say that last year the SPX was at exactly breakeven, so I'll admit that isn't a huge bull move. Still, I think this study speaks volumes for the average person's opinion of the stock market. They listen to all the negative headlines and gloom and doom that sells, while missing out on some very amazing gains.

I've noted time and time again how investors have simply missed this rally, if you look at the mutual fund outflows from stock funds and huge inflows into bonds -- and why that can be very bullish longer-term. Our Senior VP of Research, Todd Salamone, has done a great job recently in Monday Morning Outlook showing why we think the hedge funds have also missed this summer rally, and why they could be forced to play catch-up now, thus providing the next strong buying pressure.

The second example of very negative anecdotal sentiment is the Yale Crash Confidence Index. This survey shows how much confidence there is that there won't be a market crash over the next six months. They look at both Individual and Institutional investors. Unfortunately, I couldn't get permission from Yale to show you the chart on our website, but you can see the chart here. What really stands out about this survey is the fact the market is up near all-time highs, yet confidence is still very low, relative to the 2007 peak, which is the last time stock prices were up near current levels. In fact, confidence that we won't have a crash is about half of what it was back in 2007. That's pretty amazing. Not to be outdone, confidence also isn't even close to where it was anytime during the '03-'07 bull run. Again, this is very bullish from a contrarian point of view. Sure, there are a lot of scary things out there. But when everyone is talking about them, and a good deal of investors are still looking for a crash, more often than not, all of that bad news has long been priced into things.

Here are some additional articles of interest:

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Will Hedge Funds Save Us From a Market Crash?

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