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Bullish stock sentiment wanes a bit, which may be a good thing

December 31, 2010 |  8:00 am

Two closely watched measures of investor sentiment toward the stock market pulled back this week -- which, in the upside-down world of Wall Street, actually could be an encouraging sign.

The latest Investors Intelligence weekly survey of more than 100 independent investment newsletter writers showed that the percentage who are bullish on stocks for the next six months slipped to 55.6% from 58.8% the prior week.

As noted in this previous post, the 58.8% reading had been the highest since the 62% level of late-2007, which was when blue-chip stock prices hit their all-time highs before plunging in 2008.

Another sentiment gauge, the American Assn. of Individual Investors’ weekly online poll of its members, showed a sharp decline in the percentage of stock bulls, to 51.6% from 63.3% the previous week.

Although the AAII survey is notoriously volatile, the 63.3% reading had been the highest since 2004.

Wall Street gets on edge over high levels of bullishness in investor surveys because excessive optimism can be a great “contrarian” warning sign that stocks are headed for a fall. When too many people are of the same mind -- either bullish or bearish -- the market loves to confound the majority.

Still, it’s also true that relatively high levels of bullishness in the Investors Intelligence and AAII surveys often persist during rising markets. That is, after all, what makes a bull market: Not only are more investors jumping aboard, but many of those already there are reluctant to sell because they expect prices to rise further.

It’s the extreme optimism readings that bother veteran investors, so with the latest week’s survey results some nervous bulls may get a little less so.

-- Tom Petruno

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