It’s amazing the amount of one-sided thinking investors seem to be having. It seems most of the thinking is based on the notion that the Fed will always be the safety net for the equity market and any type of decline we ever receive big daddy Bernanke will step in.
BERNANKE TO THE RESCUE
Yes, we have in fact seen unprecedented amounts of monetary easing by the Federal Reserve. Yes, the rounds of QE that the market has been able to enjoy since 2008 has been like cocaine in the arm of an addict – a quick high followed by a steep drop when the drugs wear off. Bernanke seems to be enjoying his role as the markets drug dealer, happy to please those that enjoy his helicopter of cash tendencies. According to a poll taken by the CFA Institute, the greatest investing lesson learned of the previous five years, with 59% of respondent agreeing, has been that “central banks and governments will continue to bail out troubled creditors.”
SENTIMENT HAS SHIFTED
Playing the “don’t fight the Fed” game has worked over the last few years, selling when QE expires and buying when Bernanke gets out the needle and pumps the market with more cash. While nothing appears to have changed regarding Fed intervention, we have seen a large shift in sentiment.
Nearly every major sentiment survey is striking overly bullish tones in January. From Market Vane’s survey of advisors and newsletter writers which sits at 69% bullishness, just shy of the 70% we hit before the drop in equities last fall which was also the highest reading since June 2007. Hulbert Financial Digest’s sentiment reading for the Nasdaq Composite is currently at 80, the highest we’ve seen since 2004. We found out from the NAAIM survey that investment managers, for the first time since 2006 (when the survey started) are now on average leveraged net-long stocks.
Taking another look at investment managers we see according to a Merrill Lynch survey that since early 2008, the lowest number of managers said they have taken out protection against a drop in equities prices over the next three months.
CROWD THINKING
Based on this level of bullishness, the crowd must think stock prices can’t go down.
Everyone seems to have gotten on the teeter-totter and sat on the same side. There appears to be a huge imbalance in sentiment among investors these days. So does this mean the market is now required to go down? Not necessarily. It seems that market sentiment does not peak at the same time as the market. We normally see overly bullish survey readings before we get a top in equity prices. However, these types of readings have been filtering in over the past few weeks and if we do begin to see a shift out of stocks and if everyone gets off the teeter-totter at the same time too quickly, well we know what could then happen…
Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
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The TRIN index is flashing a warning signal for an equity market top. Read the story here.
The crowds are always wrong. Read a story on Jack Schwager’s views here.
