From the Desk of Willie Delwiche
Last week was the first time in 45 weeks that the weekly AAII survey showed more bulls than bears. The most recent stretch of pessimism did not eclipse the Financial Crisis in terms of intensity (the bull-bear spread bottomed last year at -43%, versus -51% in March 2009). But it did set the record for persistence.
Why It Matters: This newfound optimism is leading to some concern that the rally off of last year’s lows has run its course. This is based on the idea sentiment is always best used as a contrarian indicator. Leaning against sentiment tends to be most successful after it has reversed at extremes. The path higher for stocks becomes more clear as bulls replace bears. Rallies that are accompanied by rising optimism tend to be more sustainable. Optimism becomes a headwind after it becomes excessive and begins to fade. While on the watch for excesses, mostly we are seeing investors finally beginning to embrace stock market strength. At this point in the cycle, strength fuels optimism and optimism fuels strength. Increasing optimism after persistent pessimism is a welcome sight.
In this week’s Sentiment Report we take a closer look at how we need bulls to have a bull market and where to look for early signs that optimism could be getting excessive.