Sunday, April 14, 2019

Optimism Picking Up! Uh-Oh!

Sentiment is definitely picking up.

The widely watched American Association of Individual Investors (AAII) weekly sentiment survey presently shows bullishness rising/bearishness falling:

As does Investor Intelligence's weekly investment advisor survey:
"The bulls edged higher to 53.9%, from 53.4% last issue. That equals the mid-Mar reading. Both are highs since early Oct-18. This is the eighth straight reading above 50%, the initial level to call for caution."
"There was just a tiny decline for the bears. At 19.2%, they fell from 19.4% a week ago and again show the lowest level since Nov-18."

And here's the latest from our ETF fund flow screen (my green check marks denote optimistic reads on equity market sentiment, red, pessimistic; yellow, ambiguous):  click to enlarge...
Sounds good, right? Well, not so fast! While I'm not seeing the deliriousness that would have me coloring our weekly sentiment assessment red (I'm currently coloring it yellow), the world of investors, advisors and traders is definitely feeling better about the stock market's prospects these days than it did coming into the year. So why would I color that cautious? Well, ironically, sentiment can be one of the very best (short-term) contrary indicators out there.

Think of it this way, when everyone camps on one side of a boat, the deck of that boat (on that side) can get dangerously close to the surface of the lake. Imagine how the crowd will react the moment that boat starts taking on a little water. Yep, everyone scrambles, all at once, to the other side of that boat! In stock market terms that would be the crowd of bulls (buyers) becoming a crowd of bears (sellers) all at once, while tilting the market notably to the downside in the process.

I generally feel better about the market's short-term prospects when the passengers are more evenly disbursed about the boat. Best, however -- during ongoing bull markets -- when the crowd is concentrated on the bear side, like it was on 12/14, when the AAII survey showed literally half as much bullishness, and two and half times the bearishness, than it does today; the S&P 500 is up 12% since then...

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