No Punch at This Party

The bull market which began in October 2002 from the 7200 level in the Dow and the 768 level in the S&P is now well into its fifth year. The Dow has already moved well above its 2000 bull market peak of 11750 while the S&P cash index is getting close to its previous bull market high of 1553. Despite this I think that investors are not having much fun at this bull market party. (My last comment on the state of market sentiment can be found here. )

The most remarkable statistic I have seen lately can be found in the chart above (courtesy of DecisionPoint.com). It depicts the weekly sentiment numbers of the poll conducted by the Association of Individual Investors. The weekly bullish percentages are the green vertical bars, the bearish percentages are the red vertical bars, and the ratio of these two are the purple bars at the bottom of the chart.

Last week's bearish percentage was the highest it has been in almost a year despite the fact that the averages were all at new bull market highs at the time the poll was taken. It seems that individual investors were so traumatized by the 2 week drop in late February-early March of 2007 that they are now determined to pick the top of this rally and thereby avoid the pain of the next reaction. An even more plausible interpretation is that many investors thought the late February drop was the start of a bear market and therefore abandoned their investment positions. Now they are hoping for a reaction to so that they may repurchase the longs they sold two months ago. In either case I think that this sort of bearish sentiment seen at new rally highs means that the top is not yet in sight.

The same message comes through in three recent items in the New York Times. I have always done well by fading the Times and for this reason it is my single most reliable contrary opinion tool. Previous examples of this can be found here, here, and here. (All my contrary opinion posts can be found here.)

This past Saturday the Times again editorialized, this time on the economy instead of the stock market. The Times said: " If this strain on family finances ends up curbing consumer spending, the economy at large will be in danger of recession. [.....] When the next downturn hits in force, it will become painfully clear that American workers have not shared in the benefits of Bush-era econopmic growth..." The New York Times has been anticipating an imminent recession for the past three years. One of these years they will be right.

The next two items are the last two "Off The Charts" columns by Floyd Norris which appear each Saturday in the Times business section. Now I happen to like Norris's work and he often has interesting things to say. In fact he even "called" the bottom of the bear market in a July 2002 column. Nonetheless, Norris is like every other jounalist in the sense that he does well by telling people what they want to hear.

His April 28 column was entitled " The Dow May Be at Its High, but Its Performance Is Still Lacking". He points out in this column that the majority of Dow stocks are still below their year 2000 peaks even while the average is above its corresponding top.

His May 5 column was entitled "A Comeback for the S&P (If the Yardstick is Dollars)". Here he observes that the S&P in dollar terms has recovered most of its 2000-2002 bear market but in terms of various foreign currencies or in terms of oil there has been little or no recovery.

Both these columns give investors reason to doubt the bullish significance of the recent new highs in the averages. Norris asks his readers in effect : " Who are you going to believe, me or your own lyin' eyes ??". This attitude I also take as evidence that no significant top in the averages is likely anytime soon.