Stock bulls' camp swells, stoking fear the party is ending
It was a lot easier to believe the stock market could rally when prices were much lower and bulls were hard to find. Now, the optimists' camp is getting to be a crowded place.
Popular surveys of investor sentiment last week showed a surge in bullishness as stocks continued to climb. That's usually the way it works, of course: As the party gets hotter more people want to join it, even though the best food and drink may already be gone.
To market contrarians -- those who believe the crowd typically is too late -- rising optimism is a reason to bet that the summer rally is nearing its end.
The latest Investors Intelligence survey of market newsletter writers showed the percentage who are bullish jumped to 47.2% last week, up from 42.2% the previous week and the highest since mid-June -- which was just as the market was topping out before a modest sell-off hit.
The American Assn. of Individual Investors' latest weekly poll found 50% of AAII members now count themselves as bulls when asked to predict the market's trend over the next six months. That was the first reading at or above 50% in more than a year, and up from 47.7% a week earlier (although this survey is notorious for its volatility).
Over the last four weeks the bulls have gotten the two things they wanted most this summer: better-than-expected corporate earnings reports (albeit mostly due to cost-cutting) and more data indicating that the economy's rate of decline has slowed significantly. The July employment report on Friday, showing the smallest monthly net loss of jobs in a year (247,000), helped push major market indexes to 10-month highs.
But with the Standard & Poor's 500 index, at 1,010.48 on Friday, now up 49% from its 12-year low in March, the bears -- and some nervous bulls -- believe the market has priced in every bit of good news, and could easily be toppled by negative surprises, particularly with dreaded September approaching.
If you expect the economy and earnings to look worse rather than better in the next few months, you probably don't need an engraved invitation to sell stocks at this point. There is a still-huge camp on Wall Street that believes the bulls are misreading the economy and the market in the same way they did from 1929 to 1932, as the Depression unfolded.
But if you think the turn in the economy is more likely to continue than not, the sell decision gets tougher. It's easy to say the market is overdue for some kind of pullback after the run-up since July 10. Yet investors who were expecting a dive in late June and early July -- after the March-April-May rally stalled out -- underestimated the amount of money that was ready to jump into stocks after even a minor decline.
The S&P 500 fell just 7% from June 12 to July 10 before rocketing again. That didn't even get close to a garden-variety market "correction" of 10% to 15%.
Although the Investors Intelligence and AAII surveys show that optimism is rising -- which suggests a lot of money already has gotten back into stocks -- the percentages of bulls still are well below the levels reached in the past when investors were truly giddy.
"While some are treating [the latest AAII survey] as a contrarian, or negative, sign, when looking at a longer-term picture of the indicator one can argue that the bulls could finally be ready to significantly come back into the market," market research firm Bespoke Investment Group said in a report last week.
"During the '03-'07 bull market, sentiment remained above 50% quite a bit of the time, and it even reached 70% a few times," the report noted. "If anything, above 50% is a comfortable reading during prolonged rallies and not a sign that optimism is too high."
-- Tom Petruno
Photo: The Wall Street bull statue in lower Manhattan. Credit: Andrew Harrer / Bloomberg News