The Bull Market turned 5-years old this week. The Financial crisis of 2008 hit bottom in March 2009. A powerful 5-year bull run ensued. Many investors have not trusted this Bull Market. Emotion plays a big role for investors. Confidence is a huge part of it. Very few were hyper Bullish at the bottom. The majority were hyper Bearish. The stock market is a discounting mechanism. It absorbs new information and prices it in. Generally, stock prices are driven by future earnings. That’s why it often pays to “Buy the rumor, and sell the news”. It’s a short-term mindset, but it’s real. Investors look past these short-term events. Traders try to use them to their advantage. This 5-year Bull market has had plenty for both.
The key is to “Buy low and Sell high”. I write this with tongue in cheek, because Investing 101 sounds easy, but rarely is. In fact, Wall Street is a unique marketplace where the majority of buyers are turned-off by bargain prices. Shoppers are willing to sleep in parking lots and knock people over in long lines the day after Thanksgiving for bargain sales. Conversely, they cringe with fear and are repelled when prices are slashed on Wall Street. Throughout history, investors have violated Rule #1, and demonstrated they actually prefer to Buy high and Sell low. That doesn’t make money.
We closely follow Investor Sentiment, and use it as a contrarian indicator. No surprise, a rising stock market tends to have a positive impact on investor psychology. People are more confident when they’re making money. It’s pretty straight forward and understandable. Throughout history, excessive Bullish sentiment has led to big sell-offs. A similar thing occurs in reverse; excessive Bearishness usually leads to a bottom formation and a new Bull.
In January of 2000, Investor Sentiment, as tracked by the American Association of Individual Investors, was over 75% Bullish and just 13% Bearish. This was the most extreme sentiment divergence on record since they started the survey in 1987. Investors were feeling excessively confident. The dot-com Bubble burst just 2 months later, and we know what happened next. In March of 2009, when this new Bull was born, Bullish sentiment was merely 18% while more than 70% were Bearish. That’s when we hit bottom. Indeed, emotions play a significant role for investors, and during emotional times, logic tends to take a backseat.
You may be wondering where investor sentiment stands today. Interestingly, despite The DOW and the S&P trading near all-time highs, stats reflect a Market with only 40% Bulls and 26% Bears. It speaks to the lack of confidence in this Bull, which has been in place throughout this 5-year run. Earnings misses, an economic slowdown, and even the crisis in Ukraine haven’t been able to trip up this Bull run. It’s quite impressive.
We are well aware that this Bull is due for, and has admirably earned, a breather. He’s just not ready to pack it in yet! There’s still lots to like about this Market, so Happy Birthday Mr. Bull. Take a bow. We’re watching you closely.
We’ll be back dark and early Monday.
By: Mike Frazier