This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors. In this article, Ryan Detrick from Schaeffer's Investment Research discusses why investors should remain bullish.
Markets bottom at despair (think March 2009), and begin to rise on disbelief. Eventually, the bull market finds acceptance (this can be the longest stage), and then the blow-off top ends things with euphoria (think tech in 1999 or housing in 2007). One of the easiest ways to sum up why I've been so bullish for more than three years is very few investors believe this rally is real. The old saying "The market climbs a wall of worry" is alive and well.
Four Stages of Sentiment:
1. Despair: Marks a market bottom; desperation and hopelessness prevail
2. Disbelief: Widespread wariness of uptrend; buyers still hesitant to jump in
3. Acceptance: Acknowledgement of rally; investors embrace the bull market
4. Euphoria: Market vulnerable; little sideline cash to propel additional gains
What is fascinating with the current bull market is there are still signs of disbelief. Sure, there are signs of acceptance, but one thing's for sure: we aren't anywhere close to euphoria. There are many ways to measure market expectations, and one of my favourite is called ‘anecdotal sentiment’. This one is very tough to quantify, as it can best be summed up as what you might hear at a cocktail party or what the talking heads are saying on TV. If everyone around the Thanksgiving table is talking about buying gold, you know gold is about to peak. That's how best to summarize anecdotal sentiment.
Anecdotal evidence usually has a much smaller sample size, and the chances it could be cherry-picked are greatly increased. Nonetheless, finding solid examples of negative anecdotal sentiment could very well be some of the most powerful reasons to stay bullish, even after all of the massive gains we've seen over the past three years.
Below is a list of 10 negative anecdotal sentiment indicators. Remember, one or two by themselves could be arguably "random" and not viable as reasons to stay bullish. But when all are taken together in context, the odds that this bull market has a long way to go in terms of both price and time till we reach euphoria are very real.
1. Even in the face of a higher market, analysts are becoming more bearish. Turning to the S&P 500 Index, the percentage of "buys" among its components has steadily dropped since the lows late last year. In fact, the last time the "buys" were this low was April 9, 2010, when the US index was beneath 1,200! This scepticism in the face of increasing prices bodes well for a continuation of the rally.
2. The Yale School of Management Crash Confidence Index is near 30%, about half of where it was near the market peak in 2007. This survey shows the collective confidence that there will not be a crash over the next six months. In other words, with similar prices now, the perception there will be a crash over the next six months is much higher.
3. A recent Franklin Templeton survey of 1,000 investors showed a massive disconnect from reality and perception of market performance. This hammers home just how many people have totally missed this rally.
- 66% of respondents thought the S&P 500 Index was down in 2009, but it actually rose by more than 25%
- 48% of respondents thought the S&P 500 Index was down in 2010, but it actually rose by 15%
- 53% thought the S&P 500 Index was down last year, but it rose by 2%
4. CNBC and other market-related channels have had very poor ratings -- yet another sign of how this bull market isn't getting as much attention as you'd expect. Below is the latest data I could find, from last quarter.
- The show Squawk Box is supposed to prime traders before the bell. The show posted its lowest-rated time block since the fourth quarter of 2006.
- The show The Closing Bell is supposed to wrap up the day's action. The slot posted its fifth-lowest ratings in total viewers and second-lowest ratings in the key 25-54 demographic since 1997.
- The show Fast Money is focused almost specifically on swing-trading stocks. That time slot showed the lowest rating for the 25-54 demographic since 1997 -- and lowest in total viewers since Fast Money launched in 2006.
5. SmartMoney magazine last month terminated its print edition and moved totally to an online service. Could be a sign of the times, or yet another sign investors aren't interested in this bull market.
6. For the first time in its history, mutual fund giant Fidelity reported that it now has more assets in bonds and money markets than stock funds.
7. A survey from The Financial Literacy Group consulting firm found that 75% of high school students think the stock market is rigged.
8. Bond king Bill Gross declared "The cult of equity is dying."
9. If you are a bull, odds are you've been crushed for a variety of reasons. From "this rally is simply Fed-manipulated," to "its overvalued," to "QE is the only reason prices are higher," there are numerous reasons the crowd thinks things will come crashing down. I've been absolutely hammered on Twitter for being a bull. My take is: To be hated for being bullish in a huge bull market is very powerful.
10. A Bloomberg survey that looks at the average recommended allocations towards bonds, stocks, and cash from US chief strategists at Wall Street firms is near a 15-year low. A good deal of investors have missed this rally, and this survey suggests some of the "smart money" on Wall Street might have missed it as well.
Thanks for reading and good luck.
The original version of this article was written by Ryan Detrick and published by Schaeffer's Investment Research.
Morningstar Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com.
