The Market’s Decline: Sitting at the Riskiest End of the Spectrum

Between Greece’s recent “no” vote, Puerto Rico’s egregious debt, and the meltdown in Chinese stocks, we’re finally getting a scare in the markets. And while China’s near-6% upturn today might settle few worries, the kind of interventionist tactics they’re using never work. They only make matters worse.

Only time will tell whether this recent market turmoil will turn into something much worse. Maybe it’s short-lived like the last nosedive in October 2014. But right now, owning stocks looks even riskier… and as I’ve been discussing all year, we’ve been in the riskiest end of the spectrum for awhile!

So let’s take another look at market sentiment to see if much has changed given the pullback.

I check several indicators on a regular basis. Two of my favorites are what individual investors think about the market, and what professionals think.

Collectively, both of them are terrible at allocating to equities. Terrible! So when the indicators reach extremes, I like to take particular note.

As of right now, these guys are still very bullish. Currently, 67.2% of their assets are in stocks according to the American Association of Individual Investors. Compare that to just 41% at the market lows in 2009 and the all-time high of 74% in March 1998.

We won’t begin to reach a real bottom in this market until these individuals start hoarding a lot more cash and much selling a lot more stocks. Right now they have 17.3% of their assets in cash, compared with 45% at the March 2009 low.

Unfortunately for them, individual investors are usually the last to know something bad has happened and are often caught holding the bag. That’s why in the last crisis many 401(k)’s turned into 201(k)’s.

As for professional investors, they’ve been caught off guard as well.

Just three months ago they were fully invested according to the National Association of Active Investment Managers.  At those levels, the annualized returns for stocks were just 0.5% – less than the dividend yield on the S&P 500!

Now, despite the recent turmoil, the pros are still 55% allocated to stocks. That means we have a long ways to go before the pros throw in the towel!

This market decline could just be a short-term blip. But, sentiment’s been extremely bullish for a long period of time…

Either way, it will have to revert to extremely bearish levels – like a bottom – before it’s safe to allocate to equities again.

John Signature

John Del Vecchio
Contributing Editor

Harry Dent, a Harvard-educated business strategist and best-selling author, reveals why and when gold prices will plummet. Subscribe for free right now to read his latest report, Gold Will Fall to $700/oz.


FAQ | Cancel Anytime | We Value Your Privacy

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.