Posted At : September 4, 2009 1:15 PM
“Some reality becomes dreams and dreams become reality.” (the great Willie Wonka). Regardless of all the pessimism, the negative sentiment, the pundits touting all the economic data that proves the economy is a mess, the market continues to climb that wall of worry. This period will truly go down as one of the biggest paradoxes in financial history as the leading indicators (chart below) could not be more bullish, and investors have been factoring this in. However, bullish sentiment is largely isolated within professional investors. Interestingly, this week’s AAII survey for individual investors saw bullish sentiment fall to 34.0%, below its long-term average of 38.9%. Neutral sentiment fell to 17.5%, below the long-term average of 31.1%. And bearish sentiment rose to above the long-term average of 30.0%. This is truly astounding. What this says is the individual is getting more bearish, even as the market is rising. This is very unusual as bullishness almost always rises as the market rises. What this seems to indicate is that we are still not at the end of the rally, because when we typically get there, the professional investors sell to the unsuspecting (and increasingly bullish) individual investor. In simpler terms, the majority is seldom right and, right now there are just too many people who are bearish.
The current sideways action seems to be a healthy correction, rather than heavy selling pressure pushing the market lower. It is heavy selling, not a lack of buyers that typically creates an important market top. If declines in Buying Power continue to outpace the gains in Selling Pressure on a further market pullback, evidence will continue to suggest that the correction will be short term in nature. One of the old adages on Wall Street is major market bottoms occur when the last seller has sold. Indeed, there are numerous examples of new bull markets when the first few days of advance occur on light volume, as the few buyers meet even fewer sellers. However, major market tops are not mirror images of major bottoms in the sense that tops are not formed because the last buyer has bought. Rather, significant market tops are most often associated with overwhelming Supply swamping the remaining Demand. Tops based on light Demand and light Supply as we have now, however, are typically shorter term in nature. Currently the primary measures of the forces of Supply and Demand, the Selling Pressure and Buying Power Indexes, are not showing the sort of heavy selling associated with a significant market top. That said, the risk is rising and the potential for loss may not be worth it.
Having a definite strategy is the key, so stay alert. This is still a bear market rally and when it turns, it will turn quick and you definitely want to remain focused on your downside protection strategy and be on the ready with that exit strategy.