Barrons On Sentiment:
Survey Says
A drop in bullish sentiment may signal an imminent market
rally
By Erin E. Arvelund
"The only thing we have to fear is the absence of fear itself."
If Franklin D. Roosevelt had spent his career in Wall Street instead of the
White House, these are the words he would have made immortal. When
investors are fearless and complacency reigns in the market -- recall the
1920s and, yes, the late 1990s -- stocks almost always are poised to fall.
Today, however, fear has the upper hand on the Street, according to many of
the surveys that measure bullish and bearish sentiment among traders,
investors and market newsletter writers. Indeed, several prominent polls last
week reported that the percentage of bullish respondents had dropped to
extreme lows, signaling that a powerful rally likely is in the offing.
Why are such sentiment surveys best read as contrary indicators? When
people feel most upbeat about stocks, they're usually fully invested.
Conversely, when they're morosely bearish, they're out of the market and
hoarding plenty of cash. "The herd perpetually drives prices to optimistic and
pessimistic extremes," says Woody Dorsey, founder of Market Semiotics.
Investors track dozens of sentiment indicators, including mutual-fund flows,
volatility and industryspecific statistics. Here's a look at the recent readings of
some historically prescient surveys.
Investors Intelligence conducts a weekly poll of about 130 market newsletter
writers, and calculates the percentage who are bullish, bearish or expecting a
short-term correction. During most bull markets the survey averages 45%
bulls and 35% bears.
Earlier this year, II, as it's called, hit its most
bullish reading since 1987: 61.8%. Last week
bulls numbered 57%, while bears totaled 11.7%.
"The II index has been above-average for bulls and below-average for bears,"
says Michael Burke, editor of Investors Intelligence. "The market was looking
at a lot of optimism ahead of the Fed's rate cuts."
Burke is contemplating a second survey that would track investors' feelings
about the Nasdaq. II's persistently bullish readings confound some observers.
"Normally, when the market has been doing this badly the number of bears
1/8 in the II poll 3/8 picks up," says Sam Burns, an analyst with Ned David
Research.
Thanks to the Internet, the American Association of Individual Investors
now polls its 170,000 members daily. Respondents indicate how they feel
about the market's performance in the next six months. A 65% bullish reading
suggests a coming correction; a 25% bullish reading signals a rally ahead.
Bullish sentiment shot up to 46% last week
from 26%. Bears remained relatively
unchanged at about 34%, but the neutral
camp was nearly halved. Critics such as
Jerry Wang, of Shaeffer's Investment
Research, charge the AAII survey has lost
some validity since it went online, perhaps
because fewer people participate and
responses have grown more volatile. But
AAII President John Markese stands by the
indicator, noting that its bullish reading
ramped up to 75% at the start of 2000, just
before the market peaked.
Consensus Inc.'s index of bullish Market Opinion tracks sentiment among
more than 100 newsletter writers and brokerages weekly. The firm deems a
bullish reading of 75% "overbought", and a 25% bullish reading "oversold".
Only 22% of respondents were bullish last week. "A lot of anxious analysts
think this has to be a bottom," if only a temporary trough, says Robert Salva,
publisher of Consensus. The firm's market indicator has been fairly accurate in
calling tops. It posted a bullish high of 62% in January 2000 and again in
August 2000, just prior to big downturns.
Market Vane's bullish consensus has been published since 1964. The firm
queries commodities traders and investors in Standard & Poor's 500 futures
contracts. Just 25% of all respondents were bullish last week, right around the
low of 23% seen in May 2000. That year, the market enjoyed a strong
summer rally, and history could repeat. Generally readings below 25% are
bullish; those above 65% are bearish. The percentage of bulls hasn't topped
39% since the November elections, says Richard Ishida, president of the
Pasadena, California, company. "We're looking for a bear-market rally," he
concludes.
Lehman Brothers technician Jeff deGraaf uses Market Vane in conjunction
with the Commitment of Traders report put out by the Commodity Futures
Trading Commission. Professional traders, he notes, generally invest at
market bottoms and short at tops.
The CBOE compiles an equity put-call ratio-the total volume of equity put
options divided by call options. Readings of 0.60 are considered bullish and
of 0.30 bearish, because nervous investors rush to buy protection in the form
of puts. The ratio generally indicates the market's direction in the next two
weeks. "It's popular because it's accurate," says Jerry Wang. It's always the
first thing we look for." Last week, the put/call rocketed to 0.81 -- in other
words, a hopeful sign.
In January of this year, U.S. brokerage strategists were more bullish than at
any time in the past 16 years. Their average asset allocations form the basis of
a survey compiled by Richard Bernstein, chief quantitative strategist at Merrill
Lynch, who correctly viewed the current reading as worrisome for the
market. Strategists at the top Wall Street firms advised investors to keep
66.4% of their assets in stocks.
Bernstein terms any reading below 50.5% a buy signal, and any above 58.3%
a sell. His indicator hit sell levels for the past year, during which bonds and
cash both outpaced stocks, and is best interpreted as a 12-month forecast. |
