Investors Sentiment: Too negative!

Almost 45% of individual investors in the US described themselves as 'bearish' on the market this week. This study is conducted weekly by the Association of Individual Investors and is often looked at as a contrarian indicator to stock market performance.

The expectation that stock prices will rise over the next six months, fell to 28.7%, below the important level of 30%. This is the seventh time in the past 12 weeks that optimism has reached these low levels. It is also the 13th consecutive week that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, dipped lower to 27%, also. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped to 44.4%. This is the 11th time in 12 weeks that bearish sentiment has been above its historical average of 30%.

This week pessimistic levels are back to levels last seen at the start of June, reflecting continued pessimism among individual investors about the short-term direction of stock prices. The current 13-week streak of below-average bullish sentiment is the longest since a 14-week stretch from December 20, 2007, through March 20, 2008. At the same time, the current eight-week streak of above average bearish sentiment is the longest since a 14-week stretch from July 21, 2011, through October 20, 2011.

Persistently extreme levels in investment sentiment, such as those we are witnessing currently, cannot be maintained forever. They often are seen as precursors to large sustained up moves in equities. It will take a large catalyst, however, to remove such bearish sentiment. Is the European bail out of banks enough?

Well, markets surged in Asia this morning as investors cheered the agreement by European leaders that the region’s permanent bailout fund can be used to recapitalize struggling banks.

This agreement move caught markets off guard in Asia, and quickly put them in positive territory, rebounding from earlier losses, with the euro soaring to $1.2586, compared to $1.2444 late on Thursday night.

Author: Chris Davies

Posted in: bearish , bullish , Investor sentiment