We are through the meat of earnings season, and recently the market has appeared to be more volatile than in recent past. I was surprised then to see that market sentiment has remained at high levels.
The National Association of Active Investment Managers Survey is one of the polls I check most frequently. These are the pros, so you’d think their opinions would drive the markets, or at least reflect them very closely.
But, collectively they are often very wrong… and being aware of this can help us find opportunities to become more aggressive in stocks, or dial back.
Right now, the survey indicates too much bullishness in the S&P 500. At these levels, total returns tend to be just 0.6% annualized.
In my mind, that’s hardly worth the risk.
Research firm Ned Davis Research also conducts their own analysis of multiple sentiment polls and publishes it weekly. The recent reading crossed the threshold for “extreme optimism.”
The annualized returns with that much positive sentiment… is just 2.1%.
That’s essentially the dividend yield on the S&P 500. So, for the most part, one can expect flat stock returns and increased risk.
The third poll I look at is the American Association of Individual Investors, which looks at smaller investors.
When this poll is at extremes, it’s often best to do the exact opposite.
When your friends and acquaintances are bragging about their stock returns at the neighborhood cocktail party, that’s the time to call your broker and dial back your stock market positions.
It’s exactly what Harry says about “the dumb money rushing in.”
These individual investors are holding nearly 68% in stock. This is a far cry from the all-time lows in March 2009 at 41%, which turned out to be the buying opportunity of the century.
Granted, it’s also not as high as the bubble levels of 1998 when retail investors had 74% allocated to equities… but nonetheless, 68% is still pretty high. There’s just not much cash left to funnel into the market at this level.
Although we are over a third of the way through the year, we are pretty much where we started in terms of too much bullishness.
Often the most difficult action to take is to sit on your hands and do nothing. But in my opinion, the risk spectrum is still floating in extreme territory, and now is not the time to allocate fresh capital to equities — unless, like Adam discussed yesterday, you’re following a sector that deviates from the market’s norms.