The latest sentiment readings are disturbingly bullish. The market has not been at such psychological extremes since major market tops were last put in place. The latest reading from trade-futures Daily Sentiment Index reported 88% bulls among S&P 500 traders. The last time a reading this high was reported was on October 9, 2007 – a top in the Dow.
Meanwhile, the AAII weekly reading ticked up 2 notches to 50. We haven’t seen a reading of 50 since the market peaked back in May of 2008 just after the Bear Stearns and Fed intervention rally.
Adding insult to injury is data from Bloomberg reporting that just 3% of investors are bullish on the dollar. If you’re looking for the contrarian of all contrarian bets the dollar might just be your bet. A rising dollar in this environment would surely be a brick wall in front of equity markets. Remember, investors can remain irrational longer than you can stay solvent, but the warning flags are waving. This is a game of risk management and the risk/reward of this market is currently unfavorable. I would liken the current environment to a card counter who has just been on a tear playing blackjack, but finds that the deck is currently running low on face cards. The odds now favor the house. You can stay and press your luck, but the smart move is to simply walk away from the table….
* Special thanks to reader Dean for contributing to this piece.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.