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