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Sonder’s had some nice thoughts in her latest research report. On the bull side:

If the aforementioned leading indicators continue to improve, along with continued better housing news, we’d become even more confident that this was not just your average bear market rally.

April flowers?
Let me conclude with a seasonal tidbit. Although it’s ending on a rough note, March will likely be a relatively good month for stocks. Assuming positive performance for the month, it will be the first up month since last September.

The good news is that April has historically brought the best returns for the Dow of all months. According to Bespoke Investment Group (B.I.G.), during the past 100 years, the Dow averaged a gain of 1.3% in April while during the past 20 years, it was an even better 2.4%. To top it off, when March was positive during the past 100 years, April averaged a gain of 2% vs. just 0.2% when March was negative.

The first quarter also concludes tomorrow and at the Dow’s closing level today, it is the third-worst first quarter in the past 100 years. All three prior times when the Dow was down 10% or more in the first quarter, the index averaged outsized gains of more than 30% for the rest of the year. When the index had been down more than 5% in the first quarter, it averaged a gain of 8% for the remainder of the year.

And on the bear side:

As of March 27, 2009. When the Smart Money Confidence Index is at 100%, it means that those most correct on market direction are 100% confident of a rising market. When it is at 0%, it means good market timers are 0% confident in a rally. The Dumb Money Confidence Index works in the opposite manner. Source: FactSet, www.sentimenTrader.com.

Clearly, with the market’s rally, “dumb money” (small, odd-lot traders) confidence surged and now sits at the exact level of “smart money” (commercial hedgers/traders) confidence. The former is a contrarian indicator, the latter is not.

Although we are not at an extreme of dumb money confidence that so far in this bear market has meant renewed selling pressure (circles on the S&P 500 chart), clearly a rise in dumb money confidence warned that there was probably too much froth built into stocks in the short term.

Given that all of the prior rallies in this bear market have been false starts aseconomic disappointment reigned, I would expect pessimism to kick back in pretty quickly for the dumb money crowd.

dmiPersonally, I am more inclined to side on the sentiment readings rather than the Bespoke study that is based on just 3 prior data points, but it’s always important to keep the bull and bear perspective in mind.