Stock Market: This Is Not a Bottom

John DVFor the past two months, the market’s been acting like a yo-yo. Down and up. Up and down. All of this volatility has got investors freaked out. So, I thought I’d check in on the latest sentiment numbers to see how professional and individual investors feel about investing in stocks.

As I expected, sentiment numbers have fallen, and not by just a little. Ned Davis Research crowd sentiment is just 48.5% – all the way down from 72%. Anything below 55% means investors are becoming pessimistic about the market.

That’s not even the whole story. Active professionals are allocating only 25% to stocks. They were – get this – fully invested just this spring. By fully invested, I mean 100%. They’ve fled for the hills!

Some might see this as a bullish sign. When sentiment falls, it’s a contrary indicator to get back into the market. You want to get ahead of the rest of the traffic.

But, individual investors are still 65% allocated to stocks – significantly higher than the professionals. There’s a lot of horsepower there. So don’t think for a second that the market has bottomed.

It’s true that people are not as hyped up about the bull market as in the past. But sentiment needs to stay at extremes for a while before a new bull market can start.

People don’t jump out the window following a 10% decline in stock prices because they cannot stand the sight of red all over the ticker tape. We need blood in the streets before we know the market has truly bottomed. And only then can we aggressively start buying stocks with less risk.

For now, the risks remain. U.S. equities are still among the most overvalued when accounting for earnings over the last 10 years. And relative to revenue, the S&P 500 still trades at 1.8x, which is outrageously high. That’s not a level where long-term bottoms are made.

The other risk is earnings growth for the rest of 2015. The third quarter is coming to an end and earnings reports will start to come out in about a month.

Technology companies have a lot of weight on their shoulders this quarter. They’re estimated to account for nearly 25% of the S&P 500’s earnings growth.

I’m skeptical, as Forensic Investor subscribers are well aware. I just sent them a note earlier entitled “Short Big Tech,” and we just added to one of our winning positions.

So we’ll have to take those reported earnings with a grain of salt. The key will be the quality and sustainability of those earnings. That will help us understand whether the market will continue to tank, or rally higher.

John Signature

John Del Vecchio
Contributing Editor, Dent Research

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Categories: Stocks

About Author

In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.