What Would Catch The Most Stock Market Participants Off Guard?

SFO Magazine: Current Pessimism Resembles Sentiment of Market Bottoms

Friday, May 11, 2012
By J.C. Parets

We see a level of pessimism out there from investors that we typically find at market bottoms, not at tops.

From Individual Investor Polls to NYSE short interest to bearish headlines in mainstream newspapers, there aren’t a lot of bulls in today’s stock market.

From a contrarian perspective, if you’re bullish, the last thing that you want to see is bullish individual investors, bullish mainstream newspapers and low levels of short interest. But guess what? With the S&P500 up 100% in three years, we’re still finding the opposite.

Short Interest on the NYSE has now risen to the highest levels for the year. According to Reuters, there were 13.1 billion shares short by the end of April compared to the 12.94 billion total as of April 13. For those looking for a catalyst to take this market higher, you  may have one right here as shorts caught on the wrong side may have to quickly unwind this trade and buy shares back.

From a sentiment perspective, the most recent polls by the American Association of Individual Investors came in this week with even more pessimism. In fact, bearish sentiment rose to a seven-month high, while bullish sentiment fell to an eight-month low. Just 25% of individual investors polled felt bullish over the next 6 months. Neutral investors fell as well.

But most important, it was the spike in bearish sentiment that caught my attention. More than 42% of those polled expected stocks to fall in the next six months, compared with the 30% historical average.

INVEST IN STOCKS? FORGET ABOUT IT

This was the headline on Tuesday on the front page of the USA Today. Typically I would ignore something like this if it was more of a business or finance periodical. But in this case we’re talking about the USA Today.

Keep Reading At SFO Magazine

 

Sources:

NYSE Short Interest Up 1.3% in Late April (Reuters)

AAII Sentiment Survey Results 5/9/12 (AAII)

Invest in Stocks? Forget About It (TBP)


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

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