Trader’s Narrative

While scanning the sentiment landscape, I noticed something quite extraordinary.

The latest AAII sentiment measure is showing 54% of respondents as being bearish. By itself, that’s not unusual since we’ve seen numbers like it before. What makes this bearish sentiment historic is that:

1. it is very bearish (significantly so)
2. it follows a rise, not a fall in the stock market

Never in the 20 year history of the AAII have we seen such a rise in bearishness coupled with a rising market.

Let me say that again, this has never happened. Whenever we’ve seen such extreme bearishness it has been after a significant market decline and has actually been a reliable signal of the formation of a bottom.

Yet, here we are. The latest survey shows almost 2 times more bears than bulls - after the market has rocketed higher almost everyday.

What does it mean?
Unless this is some calculation or reporting error on the part of the AAII it means that the retail, Mom’n'Pop investor is spooked by the recent rise in the market. They don’t trust it. They think it is fake. They think the market will actually fall. During the March 2007 market decline they were nervous but not this nervous! At the bottom of the March decline, they were 45% bearish. Now, even after a breathtaking market recovery, even after new highs, they are 9% points more nervous.

What implications does it have?
From a contrarian point of view, this may seem automatically to have bullish implications. But if people start to act on this bearish feeling by taking money out of the market… selling mutual funds, selling stocks, etc. then it may in fact be bearish. As long as they remain as “smart” unbelievers, on the sideline, this would be bullish.

The level of caution everywhere is rising faster than the stock market. I’ve noticed it on blogs (cough), newsletters, columnists, etc. As the Wall Street saying goes, bull markets climb a wall of worry. Right now, you can have your pick: inverted yield curve, dollar, GDP, stagflation, unemployment numbers, etc… The bears are great at creating laundry lists of such reasons.

Maximum Pain
But if something is obvious to everyone, then it doesn’t matter. The market behaves in such a way so as to inflict maximum damage to the maximum number of portfolios. Its job is to kick you off. Your job is to stay in and ride the trend.

This latest AAII sentiment number is certainly a curve ball. Should we take it at face value? or try to out smart it?

Whatever happens, it is exciting to live a never before seen moment in market history.

As Spock would say, Fascinating.

On a different note, I’ve continued to add articles, books and other choice trading related resources to my box.net widget. Make sure to check it out and let me know if you have any special requests.