Key Takeaway: That investors are in a dour mood is not in doubt. We just saw the fewest bulls on the AAII survey since 1992 and the University of Michigan Consumer Sentiment Index is about as low as it has ever been. This week has brought news that US equity ETF’s have had outflows in three of the past four weeks. If this is just a pause in what some have called the persistent bid fueled by a move toward index investing, then this too is a bullish development. If, on the other hand, it represents the early stages of passive equity investors becoming disgruntled and looking for other options, then consider it a meaningful increase in equity market risk. Time will tell, but price and breadth improvements would help assuage these concerns. Either way, pessimism is a condition that needs a catalyst to spark a rally. It’s a pile of firewood, but for now it remains unlit.
Sentiment Report Chart of the Week: Conditions Need Catalysts
A pile of wood does not alone make a campfire. You still need a spark and dry tinder to get it going. In the same way, excessive pessimism is a market condition that needs a catalyst if it is going to fuel a rally. Whatever sparks a rally attempt, it is unlikely to gain enough strength to take advantage of the fuel on the sidelines as long as more stocks are making new lows than new highs. When that pattern changes, the odds of a small fire growing into a blazing rally increase.
