Thoughts on Sentiment

Looking at the three sentiment polls listed in Barrons. Although the % of bears is nowhere near the Feb levels, I noticed that it didn’t take much of a pullback over the last 2 weeks to turn a lot of people bearish. This suggest to me, that it would probably be difficult for the market to have a 20% correction at this time, given the mkt participants propensity to turn defensive.

last 2 wks 3 wks
wk ago ago
Consensus Inc 49 56 58
AAII 36.4 41.8 50.0 (bulls/(bulls bears)
MV 42 43 44

As I mentioned in previous comment, mkt does what it can to fool the most and it would be interesting to take a poll of number of mkt participants that think the market can finish the year up 20% vs the number who think it can finish the year down 20%.

I have my doubts on some points (1 and 5) I do agree or don’t know some others (2, 3 and 4) while for some others I have different measures (6).

And because we talk a lot about sentiment here, here is a definition of “smart money” and “dumb money”

As you can see, by that definition, “dumb money” is extremely bullish with prices going nowhere; this is typically bearish. I know it takes bulls to make a bull, but “dumb money” were wrong so many times…

thanks for your answer btw and have a great week!

It’s monday morning, I just read your note. I have no links to offer you but one In Marty Zweig’s book “Winning On Wall Street’, he has a chapter, titled “Don’t fight the Fed”, with some charts that you might find applicable

Let me offer you some other food for thought.

Reasons that the Market May Surprise to the Upside

1. First and foremost, as I have alluded too, the Federal Reserve has a history of turning markets when attempting to stimulate the economy and we have just experienced the greatest global stimulus package in history. Although massive borrowing has some negative longterm implications, for the shortterm, it is very conducive to gains in equities.

2. On March 23, 1992, we had a ten day period where advances lead declines by more than 2/1 suggesting that this rally has legs. This was the first such occurrence since 1992, but these have a 95% record of predicting positive years since 1950

3. Leading Economic indicators were up solidly in both April and May, suggesting that the economy should be improving and that very possibly recession is over for now. These were the first back to back gains since Sept of 2006 and they were solid gains.. Stronger Commodity prices suggest demand for goods as well.

4. S&P (918.90) is above 200 day moving average (898.35) which is important to many market timers. Coppock Curve model positive as well.

5. Even after the 40% rally, there is still near record levels of cash on sidelines.

6. Note that in the last two weeks, as the market has traded sideways, sentiment polls, went from neutral to decidedly bearish, indicating that the market has the ability to climb a wall of worry in current environment. The market tends to fool as many people as possible and the move that would surprise the most people right here is straight up.

“We may eventually get to 0.4 on the Q Ratio, but you may miss a monster bear mkt rally over next two years waiting for stimulus to exhaust itself and inflation to kick in. ”

How high the rally then and how do you know the stimulus will work for 2 years? thanks

Most all valuation models now show the 50’s as an incredible buying opportunity with interest rates at 2% and earnings yields at 10%.

We may eventually get to 0.4 on the Q Ratio, but you may miss a monster bear mkt rally over next two years waiting for stimulus to exhaust itself and inflation to kick in.

Valuation models are usually traps for traders. For example, in retrospect the market was way overvalued from 95 to peak in 2000, but the mkt doubled regardless.

Also mkt was extremely underpriced in early 74 about half way down the 50% decline. Value is not nearly as important as Cash. Money makes the mare run

Can you tell where from do you take the Tobin’s Q ratio? Is it updated weekly or monthly? Do you calculate that by yourself? I don’t have any knowledge with this indicator. thanks

Thank you.