Taking The Market's Temperature - Main Street Edition

 |  Includes: DIA, IWM, QQQ, SPY
by: Don't Quit Your Day Job

We’re on record as of last November predicting a plateau (well, technically we predicted a gentle upslope) in the American stock markets… at least over the decade ending November 2023. As part of our hedging, we checked a number of indicators – including so-called “market sentiment” indicators – when we made our call.

Now, our investor articles in general come in sort of a staccato rhythm. Since we’ve been conspicuously absent from the market and investing community recently, we wanted to reenter the cage and repeat our analysis of what individual investors are thinking.

Our conclusion? It’s been 6 months of ‘paltry’ gains compared to the epic returns of last year. There’s no reason to turn back now on our theories.

Oh, for those that enjoy our Dollar Cost Averaging articles – keep investing, and skip this piece…we just like to have a leg in both pools. You don’t need to. There are too many children in this one, anyway.

The American Association of Individual Investors

By far the best survey on the investor sentiment side comes from the (excellent) American Association of Individual Investors. They take a large sample of individual investors…the "main street" we referred to in our valuation articles…and ask them: “Are you bullish, bearish, or neutral over the next 6 months?”. Historically, the market has tended to behave the opposite of what investors have predicted. Here’s an update of our November piece, this time going back to 2000 with the S&P 500 (no reinvested dividends) in the background:

Click to enlarge

And, since I know you can’t zoom into that visually, here’s the recent entries (and these are rough close prices, provided by Yahoo!:

Date S&P 500 Close Bull-Bear Spread
3-6-14 1878.04 13.9%
3-13-14 1841.13 14.5%
3-20-14 1866.52 10.6%
3-27-14 1857.62 2.5%
4-3-14 1865.09 8.6%
Click to enlarge

Be Fearful When Others Are Greedy

You hear the classic quotes so many times imploring you to slow down when others are greedy, and urging you to load up when people are scared. In those nuggets of wisdom, there is almost universal truth – by definition. If "everyone" was truly bullish, it would only take a few people taking the other side of the bet to cause a stampede. With 100% of people bullish, who is going to buy when there are no bears left to convert?

Now, I’m not saying that’s the case now – 8.6% is relatively tame from a measure that saw 36.5% spreads as recently as the end of December.

I’m just saying drive carefully. I’m still buying stock, just not with the expectation that it’ll be rocketing 30%+ yearly.

Make sense?