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Sentiment Is Not as Bullish as You Think, Despite a 145% Rally in the S&P 500


The truth about sentiment is far more nuanced than headlines would indicate.

Lights out tonight, trouble in the heartland.
Got a head-on collision, smashin' in my guts, man.
I'm caught in a crossfire that I don't understand.

-- Bruce Springsteen, "Badlands"

As of the Friday market close, the S&P 500 (INDEXSP:.INX) is up a whopping 145% off the March 2009 housing crisis low.

And year-to-date, it's had a remarkably steady rally, adding up to a 15% gain, as seen in the chart below:

We're seeing very bullish readings from traditional sentiment indicators, which is normally indicative of a top.

Last week, the American Association of Individual Investors' weekly investor sentiment survey went up to 40.79% bulls from 30.99% last week.

Likewise, the Investors Intelligence Advisors' Sentiment Survey had 52.1% of participants identifying as bullish, up from last week's 47.9%.

And on the anecdotal side, Mila Kunis -- FHM's Sexiest Woman in the World -- has stepped up on the bullish side this year, and Jim Rickards, author of Currency Wars: The Making of the Next Global Crisis, recently tweeted about making money in the midst of a bubble:

Even Nouriel Roubini -- a.k.a. Doctor Doom -- recently came out as bullish on CNBC:
It could go on for another year or two.

Of course, there are two forces. Growth is slow. Earnings growth is also slowing down. Top line and bottom line are not as good as they used to be, but margins are high. They could correct, somehow, over time.

But you have the gravitational forces of slow economy leading eventually to correction, but then the levitational forces of QEs, zero policy rates, more money coming in the market – not just from the US, but from other economies – it's going to levitate asset prices.

Now, on the Buzz & Banter, I've been making the case that sentiment is far more bearish than traditional indicators and headlines would indicate.


As you can see in the Rickards/Roubini comments, both bull cases are actually built on an underlying bearishness that is offset by central bank manipulation.

I've also noticed this in everyday conversations with investors -- bull cases are not built on a belief in economic strength. They always revolve around asset inflation via money printing.

I think this is quite an interesting angle that deserves more attention.

How bullish can the crowd be if no one is bullish on the real -- as in, non-financial -- economy?

Yet simultaneously, look at the ongoing hatred toward the Fed, despite the fact that the fearmongers' warnings of inflation and dollar-crashing haven't come to fruition. (See: Everything You Think You Know About the 'Big Bad Fed' Is Wrong.)

Remember when Alan Greenspan was the Maestro?

Take a look at this book description:

Perhaps the last Washington secret is how the Federal Reserve and its enigmatic chairman, Alan Greenspan, operate. In Maestro, Bob Woodward uses his proven interviewing and research techniques to take you inside the Fed and Greenspan's thinking. Woodward presents the Greenspan years as a gripping narrative, a remarkable portrait of a man who has become the symbol of American economic preeminence. (emphasis mine)

These days, in the wrong company, calling Fed Chairman Ben Bernanke "the symbol of American economic preeminence" could get you cracked in the head with a lead pipe.

Anger at Bernanke and/or the Fed is a symptom of an underlying distrust in the system.

It was easy to feel hoodwinked after the tech and housing bubbles. Now, no one wants to be the sucker that buys in to the Fed's so-called games.

But if we really were in a bubble of bullishness, wouldn't there be more faith in the Fed at this point?

Now, let's take a more direct look at what real investors in the trenches are actually saying about this market.

On Friday afternoon, I put a call out to Buzz & Banter subscribers to get their thoughts on the following questions:

Are investors complacent?

Or is there merely a bull market in market commentators calling other investors complacent?

And if so, what does that say about sentiment?

In fact, the word complacent was being tossed around so often that I was able to actually make this screen grab on Google News:

We didn't get one answer that indicated any serious optimism regarding the economy. In fact, the overriding theme was one of caution.

So let's go through some of the responses.

From Steve:

Everyone I talk to is complacent about equities. Very scary up here.

From Harold:

Does it have to be an either or proposition?

Is there any reason it cannot be both? A bull market (just cyclical or secular, take your pick) and a bull market in commentators calling investors complacent?

Everyone is ambivalent.

The real questions are: How long is this bull market going to last? Does it go through the summer? How long before any real pullback? When does a "REAL" pullback happen? How bad is it going to be? How many head fake little pullbacks happen before it?

From Sterling:

I've been through bull markets and this does not feel like one. People are not working in numbers and real estate are not trading hands with gusto.

From Mark:

This market isn't about investors. Investors don't control 2/3 of the daily volume anymore. The algos look at each day in a vacuum with no regard for fundamentals, overbought/sold, good or bad news. It's void of emotion or sentiment. To compare it to a casino would be unfair to casinos since they have rules.

From Joe:

I can't figure out this market. The only sensible reconciliation I have is that things are beginning to get less bad. Take unemployment. It's down not because jobs are up, but rather people are out of unemployment extensions and now finally have to go back to work. Foreclosures are down because if you survived this market already, it's unlikely you'll foreclose, now, and the banks have had such a tsunami of foreclosures that anything less simply seems better. There are no private investors and those in are only putting their tiptoes in. People are buying homes not because they want to ... but they are simply tired of the move-in with in-laws. That said .... we still have a dysfunctional bipartisan Congress/ gov't and short of Ben keeping up the money hose, there will not be any gov't stimulus. Perhaps the mourning is over and we should feel better. But I can't help think this is somewhat of a sucker's rally where people's greed sucks them in, and then the market takes a swift after-hours elevator plunge. I am invested, and mine have not done as well as I like. Yet other's are crazy. I can't figure out this market.

From Cynthia:

1. Investors are complacent. Things may look good on the surface in the US, but there are timebombs awaiting investors in the US stock market who don't pay attention to international events:

A. Austerity in Europe can't continue forever; people won't starve to death politely. If Germany exits (looking more and more likely), that would have huge repercussions. It would also allow Draghi to print (as former GS and an Italian, I believe that's what he wants). Bennie may not be able to keep up; US stocks go down.

B. Japanese Central Bank is printing big time. If Bennie merely maintains the same level of printing, he loses and US stocks go down.

C. China is a disaster waiting to be recognized; again, huge repercussions for perception of global demand. Market participants would no longer believe we can grow our way out of this; market goes down.

D. Global derivatives dwarf global GDP; there is no way that Bennie could print enough to cover that margin call. Private and government debt remains extremely high in most large countries; much of this is non-performing debt which has not yet been recognized as such. Potential deflation really overwhelms any potential inflation which could be created by any and all central banks.

E. Investors think Bennie has their back, but see A, B, C, and D.

2. It's easy to call other people complacent while you are still leveraged long but think you will be the first to get out. Sell side crowd (most analysts have this orientation) must declare themselves to be long. So I would consider all of this name-calling to be nervousness among the leveraged longs as this move gets very long in the tooth (per Saut).

3. I think sentiment is still bullish, but it is getting flaky. The market is starting to sense that Ben may not be the printer-in-chief for the world going forward, and that this might have implications for the US market. It looks to me as though we are still in the denial phase, however.

From Terry:

I am a retired man in my late 60s trying to manage my investment nest egg in this crazy environment we find ourselves in.

I would not label myself complacent, but fearful.
From what I read there are a lot of other investors with a like sentiment.
I have not trusted this market from its beginnings in March 2009 but did pretty good in gold until September 2011.
All the markets are so manipulated. It is hard to fight against the manipulators.
At some point, the manipulators are going to lose control and all hell is going to break loose.
So the fear of this dark hole keeps me from being more than just a little invested with an eye on the exit door.
I think the market would have corrected, but the manipulators won't let it for fear a pullback will turn into a major decline.
The shorts (myself included) have been burnt numerous times and are reluctant to short this market, but don't think they aren't waiting for signs of cracks in the structure.
Complacent no -- tense yes.

If sentiment really was bullish, wouldn't we be able to find a single true believer in the economy with the stock market at all-time highs?

Among investors, there seems to be an obsession with being intellectually right about the Fed rather than making money.

A normal market top is usually characterized by extreme greed, 100% unadulterated faith in the US as a corporate power, and eye-rolling at economic bears.

Additionally, let's look at what's really outperformed this year. In terms of sectors, the big winners have been utilities (NYSEARCA:XLU), health care (NYSEARCA:XLV), and consumer staples (NYSEARCA:XLP). This is as poor an example of stock market greed as I've ever seen.

I'm not even going to go into the strength of low volatility ETFs like the PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA:SPLV).

So while the headlines may indicate extreme bullishness, the truth seems far more nuanced.

Does that mean it's time to actually buy?

I don't know.

Since I've been underweight stocks all year, I don't really have the confidence to answer that question.

Twitter: @Minyanville

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