AAII Poll Shows Widespread Bearishness: Time To Buy

Hickey and Walters (Bespoke) submit: Thursday morning’s Wall Street Journal market recap article called the recent rally a ‘Buying Panic’. But the part of the article we found most notable was the sentiment it portrayed. The story commented that even bullish investors were becoming more cautious and bracing for a short-term pullback. Among the concerns cited was that consumer stocks should be avoided as they rely too heavily on a strong economy and consumer spending.

While many would agree that the falling housing market will eventually hurt consumer spending, two later articles in the Money & Investing section show that is hasn't happened yet.

The first headline reads, “Cablevision Systems, MasterCard Advance”, and leads off with…”MasterCard (MA) and Yum Brands (YUM) closed at record highs as their profits pleased.” Both of these stocks rely on spending by the consumer. While one could make the argument that both MA and YUM derive a large percentage of their sales overseas, another headline on the same page reads, “Chipotle and Buffalo Wild Wings Gain”. Both these restaurant chains reported stronger than expected earnings after the close on Tuesday, and both have all of their sales coming from the US consumer. On Wednesday, Chipotle rose 18%, BWLD rose 14%, MA rose 10%, and YUM rose 6%. Makes you wonder whether consumer spending is weak after all.

Finally, while a pull-back after the rally we have had wouldn’t be a surprise to most, this could be the very reason against one occurring -- everyone is expecting it. In April, most investors expected a lackluster earnings season, and we ended up with much stronger than expected results. Yesterday, as the AAII poll told us, most investors (54%) think the market is due for a fall, and you can see below what happens when bearish sentiment gets this high.

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Comments

[knut_thalmann:]

Maybe this time the bears get it right. Bearishness on the top and not on the bottom / after a downtrend. Economy seems to slow down smoothly but high margin debt and bullishness of private equity funds. It seems so easy just to get a company private and then just hold it for some months and get big profit out of going public again. You only need to have the rigth borrowing resources. I don't know but based on experience I would say money is not so easily to make thus sooner or later this card house will evaporate and the bubble will burst.

2007 May 04 10:53 PM

[dmm742:]

Since the market is at 5-year highs while AAII sentiment is at levels most recently associated with selloffs, something seems amiss. When an indicator is behaving in an opposite fashion to its usual pattern, either it is no longer functioning as it usually does or it is telling a very different story. We will find out soon enough, but possibly worth noting that the last time the AAII bears were 50%+ while the market was at new highs was in March 2000.

2007 May 05 01:18 AM

[mavericks:]

Institutional managers are using hedging strategies rather than selling it seems to me. Instead of selling positions at big gains, especially after the run from June-July '06, why not just short the QQQQ's or SPY's or buy the Profunds Ultrashort funds. Those volumes have skyrocketed in recent months. After June-July when long term gains kick in, this may change and we may see more selling pressure.

2007 May 05 11:44 AM

[samuellys2007:]

I believe Dow will hit 14,000-15,000 range by year end, really. Consumer spending will continue to be robust, despite inflation. This time, it is consumer spending induce inflation rather than commodity price induce inflation, therefore economy will continue to expand after all.

2007 May 05 12:08 PM