From the desk of Willie Delwiche.
Key Takeaway: In July, consumer expectations for stocks dropped to their lowest level since March 2009. Excessive optimism is clearly not an issue for stocks right here. But bulls need to be resilient if the market is going to move higher. Recent breadth and momentum thrusts are fodder for optimism, but the persistent downtrend in stocks is dampening rally attempts. The latest numbers from AAII, II and NAAIM suggest questions about bullish resolve are well-founded. All have rolled over and are showing increased caution. If that continues, a broader re-set becomes more likely - one in which positioning (which has been resilient) gets more in line with sentiment.
Sentiment Report Chart of the Week: Expectations For Stocks Have Tanked
Among the questions asked in the University of Michigan Survey of Consumers is one regarding expectations about the direction of stocks over the coming year. Specifically it asks about the perceived likelihood that stocks will rise over the next 12 months. When that data for July was aggregated, it showed the smallest probability that stocks will move higher since March 2009. That is not too out of line with some of the other sentiment extremes witnessed earlier this summer. But it also highlights the continuing contrast between sentiment and positioning. In March of 2009, the AAII asset allocation survey showed 41% exposure to stocks. In July it was at 64%. Prior to this year, the correlation between these two surveys was better than 80%, but they were further apart than ever in July.