Bullish Sentiment is Below Average Again

And there you have it folks. All it takes is a 1.2% correction from an all-time high close and the masses run away. Last week the American Association of Individual Investors poll had its largest weekly increase in bulls since March. But after this monster 1.2% decline in the S&P500, the latest poll not only erased all of last week's increase in bulls, but is now well below its long-term average, again.

I write this blog post, not to document every twist and turn in this particularly noisy sentiment indicator, but to point out that the bears are ready to jump in on any pullback and the bulls are scared to death. Here's what Jani Ziedins over at Cracked Market had to say:

"....another obvious short entry for the doubters and bears.  I am sympathetic to their point of view given how long and far this market came without pausing, but doubting this rally is still the popular thing to do and is why more upside remains.

Recent volatility is shaking out weak holders and late buyers, as well as seducing bears to go short.  The problem is much of this selling is already behind us.  When everyone expects something nasty, they are either already out, or act quickly when they see the first cracks.  Their trigger finger lead to last week's stunning 2% intraday reversal.  Even bulls are afraid of this market and are waiting for a pullback before buying more.

We must not confuse trend with sentiment.  Just because the trend is higher doesn't mean the market is overly-bullish.  In fact the reason the market keeps going higher is because it was overly-bearish and there was an ample supply of traders out of the market available to chase it higher.  At some point we will run out of buyers, but the supply remains plentiful as long as people keep doubting the sustainability of this market."

Here is the updated chart showing the percentage of bulls according to the AAII compared to the S&P500 just off all-time highs:

This week's USA Today cover page proclaiming that this bull market is now on solid footing is evidence that the general public has finally caught on to what's happening in stocks. Recognition of a big trend is step 1 to the end. However, these weekly sentiment polls indicate to us that investors are still scared and waiting for this pull back that never comes. Guys we're sitting just off the highest levels for stocks in American History. But somehow, there are a lot less bulls than the historical average. A lot less....

Sources:

Another Pause (Cracked Market)

Sentiment Polls Week Ending 5/29/13 (AAII)

Bullish Sentiment Drops Back Below Average (Bespoke)

Tags: $SPY $SPX