At our October seminar I highlighted how attitudes of investors had changed, largely from negative to positive, toward a number of investment asset categories. In early 2008 the equity markets were collapsing and investors couldn’t get away from stocks fast enough. What almost two years and a couple of trillion dollars of government support can do! Now after the major stock averages have recovered more than half of their decline from the 2007 highs, investors are once again confident. The front page of today’s USA Today trumpets the opinion of several experts that it’s time to get back into equities.
Within the last week, several measures of investor sentiment have reached extremes. The latest figures from the American Association of Individual Investors (AAII) show an extremely bullish 50-27 bull/bear reading. Elliott Wave International points out that the 10-week moving average percentage of bulls poll is at a six-year extreme, far surpassing the bullish levels at prior market peaks.
This week the Investors Intelligence Poll showed more bulls and fewer bears, with the spread between the two camps approaching the all-time high reached in October 2007, just as the stock market began its decline of more than 50%.
This morning Lowry Research Corporation pointed out that the Chicago Board Options Exchange equity put-call ratio continues toward its bullish extremes. Its 10-day moving average has fallen to levels not seen for several years except for this past April, immediately preceding the April to July market decline.
Last week’s ISE Sentiment Index recorded its highest reading in almost five years. The 10-day moving average of the New York Stock Exchange TRIN reached its most overbought point in 20 years.
Sentiment readings can remain elevated in a bull market, but extreme levels serve as a warning that the market’s price move can be approaching a point from which prices need at least a meaningful correction. In an environment in which entire countries are dependent on bailouts for financial survival, extreme bullishness should act at least as a warning flag.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.