The stock market still appears to have legs. We have been waiting for the inevitable “consolidation” in the stock market for some 6 weeks now. We have felt that there was a growing complacency towards the rally. However, now that the Dow has pulled back some we have been rather surprised at how quickly the crowd has become less optimistic or outright bearish. It seems that too many punters are now of the opinion that this market is off to test its March lows. This is very bullish news from a contrarian perspective.
The Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average recommended stock market exposure among a subset of short-term stock market timing newsletters tracked by the Hulbert Financial Digest. It today is 30 percentage points below where it stood earlier this month, even though the Dow is just 3.7% below its rally high.
That represents a rather quick retreat on the sentiment front, and suggests that we’re not seeing the kind of stubbornly-held bullishness that often spells a rally’s doom. The HSNSI’s current level is a mere 15.8%. The last time this sentiment index was so low was in late March/early April, when the Dow was more than 5% lower than where it stands today. In other words the average market timer considers the Dow’s current level of around 8,500 to be more bearish than the 8,000 level was two months ago.
A similar sentiment story is being told by the survey conducted weekly by the American Association of Individual Investors. Just 28% of the respondents to the most recent AAII survey reported that they are bullish, which is the lowest level of bullishness since the survey conducted over the week ending March 12.
What if the Dow fell down to 8000 level over the coming days? Just how many bears would come out of the woodwork then? It just seems the bears are too quick to come out of hiding at the mere hint of weakness in equity markets. Markets go where the crowd least expects…….right now the path of least resistance appears up!
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