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Sentiment - Another big move in markets ahead?

The latest sentiment numbers from the AAII survey may have surprised a lot of observers. Normally when the market rises for several weeks the amount of bulls gradually rises and it typically exceeds the amount of bears by a significant number. Another thing that tends to happen is that the market neutral participants tend to turn into bulls, but did I say ‘typically’. Well this current rally does not seem to be typical at all but before we get into the nature of the rally let’s look at the sentiment numbers in detail.

This week’s results show 32.4% bulls (-3.0%), 34.7% bears (+4.8%) and 33% neutral (-1.8%).  The long-term averages are 38.9% bullish, 30.2% bearish and 30.9% neutral.  Those numbers tell us two things, for one the current rally should still have room to the upside until we see the amount of bulls get to their long-term average and even more importantly the large amount of undecided (neutral) investors will still have to jump onto the bandwagon (stock market), possibly causing the market to make one final sharp move up in April.

The Put/Call Ratio and the Smart-Money Flow Indicators also support that scenario as we have not reached critical levels yet. So while a lot of technical indicators look overstretched the sentiment indicators still leave room to the upside, but then again the rally of the last 5 weeks is not typical. It should have run into some serious headwind by now since bonds, commodities and currencies seem to have started to look the other way, but most fund managers run out of options. The dilemma if you are a large institutional ‘long only’ investor is that you don’t have too many options left. With the ‘Sweet times’ in bond markets gone they can pretty much only pile into the already crowded stock market hoping that Mr. Bernanke will supply it with enough juice so that it keeps rising for a few more months. The stock market rally has by now become a liquidity rally again and we know all too well from experience that it is a dangerous game.


Disclosure: "no positions"