Small investor sentiment has soared to new 2010 highs and hit levels not seen since August 2009 when stocks had rallied 50% off the March 2009 lows in a near straight line. To the small investor there is little that can go wrong with equities now. We have seen just six prior readings approaching 50% in the last three years and in four of those cases stocks traded lower by an average of 14% within the next two months. The two exceptions to the rule were during the 2009 bull market when stocks were invulnerable. Charles Rotblut of AAII added some more color to today’s data:
“This was the third consecutive week that bullish sentiment has made a big increase. Since falling to 20.7% on August 26, bullish sentiment has rebounded by approximately 30 percentage points. At the same time, bearish sentiment has plunged by approximately 25 percentage points.
Two factors are at play. The first is the market’s recent rebound. The rise in stock prices is giving some investors hope that a short-term bottom in the market has been formed. The second is the reduction in chatter about potential deflation and a double-dip recession. Though the economic data has not been great, it has been good enough to give some assurance that recovery is continuing.”
The Investor’s Intelligence survey continues to lag the AAII poll substantially. At just 36.7% the reading is far less bullish:
Sources: AAII, II
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.