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Stock Market Pessimism Rises But Actions Speak Louder Than Words

Reading through countless blogs each day, the general tone regarding global economic growth and stock markets is highly pessimistic. In fact, many investors and market watchers have recently been arguing that the extreme pessimism could be a bullish contrarian signal. This week's report from AAII (courtesy of Pragmatic Capitalism) provides support for this thesis:

Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 8.0 percentage points to 22.2%. This is the lowest that optimism has been since August 26, 2010. It is also the 68th lowest bullish sentiment reading out of more than 1,300 weekly readings in the survey's history. Optimism has now been below its historical average of 39% for 16 consecutive weeks.

Although I normally enjoy taking a contrarian perspective, history has also taught me that actions often speak louder than words. Here's a look at the S&P 500 over the past year:
Source: Yahoo Finance

This market is up nearly 10% year-to-date and almost 8% from its recent low less than two months ago. Are the pessimists hiding out in options? Here's a look at the VIX over the past year:
Source: Yahoo Finance

The VIX is down approximately 40% in the past couple months and approaching its lowest level in the past few years.

These two charts tell a very different story than the one currently being portrayed by mainstream media. While sentiment surveys are turning overly bearish, investors with money on the line are clearly willing to buy and/or hold stocks at higher prices. Further, the rapidly declining VIX suggests a minimal desire for protection. As the actions of investors have diverged from their words, the former likely offers better insight in to actual market sentiment. Over the years, corporations have clearly learned how to game earnings in order to consistently beat expectations by a significant margin. Maybe investors have finally learned how to game sentiment indicators to bait others in to following the trend.