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No One Trusts Wall Street (and Why That's Very Bullish)


Schaeffer's Senior Technical Strategist examines what financial skepticism among high-school students means for stocks.

Here's a survey that caught my attention this morning. It's a national poll of nearly 900 high school students in regards to their opinions towards banks, credit unions, credit card companies, and the stock market. This was conducted by the Financial Literacy Group and shows some very incredible levels of distrust towards the financial area in general.
Here are the key highlights (or lowlights) from the poll:
  • The majority of students responding to the survey (60%) believe that credit card companies often entice people into taking on more debt that they can handle.
  • Over 70% of students believe that businesses often try to "trick young people" into spending more than they should.
  • Only 25% of students disagreed with the following statement: "The stock market is rigged mostly to benefit greedy Wall Street bankers."
  • Only 15% of students are aware that credit unions are different than banks with respect to their not-for-profit status.
  • Fewer than one in five students who responded to the survey (17%) disagreed with the statement that "Banks are mostly interested in getting my money through hidden fees."
We've heard this is a lost generation toward the stock market and this survey does nothing to change that opinion. The bullet I'd like to focus on is:
  • Only 25% of students disagreed with the following statement: "The stock market is rigged mostly to benefit greedy Wall Street bankers."
Say what you want, but here is a quick, off-the-top-of-my-head list of why young investors don't trust the market:
  • Two 50% crashes over the past decade
  • The housing bubble
  • The credit bubble
  • The flash crash
  • JPMorgan Chase & Co. (JPM) lost billions due to hedges gone awry and the London Whale profits
  • The BATS Global Markets, Inc. screwed up their own IPO
  • The Facebook Inc. (FB) IPO disaster
  • Madoff Scandal
  • MF Global (MFGLQ) scandal
  • Knight Capital Group Inc. (KCG) imploding potentially causing 1,500 people to lose their jobs due to a few bad trades
Are there more? Sure, but you get the picture. If all you ever grew up with were headlines like these, then I guess it would be tough not to be very wary of stocks.

Here's the next part, though, and it's actually incredibly bullish. We have an S&P 500 Index (SPX) up well over 100% the past few years and it looks like it wants to keep going higher. The main reason is expectations are so low in the face of higher price action. When you have guys like Bill Gross saying stocks aren't worth the trouble, you have a very bullish mixture of outright distrust of an entire asset class and some very negative anecdotal sentiment. Which, as long-time contrarians know, is exactly what you want to see for much higher prices to continue.

We've called this bull market the most hated bull market of all time and it's true. Is volume low? Are small caps lagging? Is revenue missing the mark this recent earning season? Is Europe a total disaster with no fix in sight? Yes, all of these questions are 100% true. Yet, they are also fully priced into things. That's what so many market pundits don't get. If everyone is saying something and it's all over CNBC -- it is probably already priced in. Then, if you can get any good news at all, the spark is set for a potentially big explosion. My favorite way to describe this is the action in short interest. You can read about it here, but the bottom line is the shorts are as high as they were right before a massive 30% rally that kicked off last fall. Will we rally that much again? I have no clue, but I sure feel better siding with the bulls here.

Lastly, here's an updated chart of what the mutual fund crowd is doing. As you might have expected, we've seen huge inflows into bonds and an exodus from stocks. In fact, according to the Investment Company Institute, over the past 12 months we've seen $218 billion inflows to bond funds and $150 taken out of domestic equity funds. As Todd Salamone mentioned recently, if bonds are the next bubble to burst, this could be very bullish for stocks as money finally begins to move to the more "risky" assets.

I mentioned on Twitter last week that the most incredible stat I've seen in a long time is that the Dow Jones Industrial Average (^DJI) is up nine of 10 months; yet, we've see outflows from stock mutual funds nine of 10 months! The reason everyone hates this bull market is that they missed it. Think about it, we've had a multi-year bull market while there have been virtually no inflows. Just think what could happen if people actually started moving their assets into stocks?

This article by Ryan Detrick was originally published on Schaeffer's Investment Research.

Below, find some more great content from Schaeffer's Investment Research:

Can the Rally Survive the Minefields Ahead?

Will Bonds Be the Next Bubble to Burst?

Are New Highs on the Horizon?

Twitter: @schaeffers
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