Sentiment Data Points To Higher Market
The Dynamic Wealth Report
September 19, 2011
by Robert Morris, Editor
The latest consumer sentiment numbers came out on Friday. Thomson
Reuters and the University of Michigan provided preliminary figures from
the widely followed consumer sentiment index.
And the numbers are encouraging.
The data show consumer confidence crept up from 55.7 in August to 57.8
in September. While the index is still mired at extremely low levels,
the uptick is good news for investors.
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Remember, consumer sentiment plunged in August to the lowest
levels seen since May of 1980. Many were expecting the indicator to drop
modestly from 63.7 in July to 62.0 in August.
But it came in at an astonishingly low 54.9.
You may recall I talked about this data in my August 15th article,
Is
Heavy Consumer Pessimism Actually Good For Stocks? I explained how
extremely low readings in consumer sentiment have often coincided with
market bottoms.
Here's what I said...
"You see, whenever consumer confidence has fallen to this level, the
market has mounted huge rallies. In 1980, the S&P 500 turned on a dime
and put up gains of 36%. And after consumer confidence plunged in March
2009, the blue-chip index bottomed and then soared 105% over the next
two years."
Well, the September consumer confidence number appears to support my
argument. By moving higher this month, the sentiment index may have
begun a major reversal. Of course, only time will tell if sentiment
levels are headed higher, but for now it looks like the August number
was the bottom.
And since then, the market's moved higher as well...
The S&P 500 hit a low of 1,101 on August 9th. This past Friday, the
large cap index closed at 1,216. That's a rise of 10.4% in just five
weeks' time.
Still not convinced?
Check out the latest investor sentiment data...
Investors Intelligence (II) and the American Association of Individual
Investors (AAII) both track investor sentiment on a weekly basis. Last
week, numbers from each survey showed the percentage of bearish
investors was higher than the percentage of bullish investors.
It was the first time this has happened since September 2, 2010.
Of course, we all remember what happened last September. The S&P 500
went on a tear, climbing 22% over the next six months.
At face value, the investor sentiment numbers are a bit frightening. They seem to indicate we're in for more stock market losses in the
months ahead.
But these surveys, like the Michigan survey, are contrary indicators.
Time and again, deeply negative readings on consumer and investor
sentiment coincide with market bottoms.
In fact, our friends over at Bespoke Investment Group just completed a
study which illustrates this point.
They went back as far as 1987 and calculated the S&P 500's one week, one
month, three month, and six month returns following weeks where the
bears outnumbered the bulls in the II and AAII polls. Then, they
compared those returns to the S&P 500's performance following periods
when the bulls outnumbered the bears in each poll and when the two polls
had mixed results.
Bespoke's findings are enlightening to say the least...
"[T]he S&P 500's average performance is greatest for each time frame
when bears exceed bulls in both surveys compared to any other
combination. In fact, the average returns of the S&P 500 when bears
exceed bulls in each poll is more than twice the average return of any
other combination (bulls exceed bears in both polls or mixed polls)."
(emphasis added.)
Bespoke went on to say...
"In terms of the frequency of positive returns, one month, three months,
and six months following weeks where both polls have more bears than
bulls, the S&P 500 has seen positive returns at least 70% of the time."
(emphasis added.)
Based on this extensive analysis of investor sentiment and S&P 500
performance, we're left with only one conclusion. The market is much
more likely than not to head higher in the weeks and months ahead.
So, when you're reading all those doom and gloom predictions in the
mainstream financial news, don't let them scare you out of the market.
You can simply smile to yourself and take comfort in knowing the odds
favor higher market returns over the near term.
**** Editor's Note*** While the markets have been
bouncing around like a Mexican jumping bean, one investment type is
seeing huge money inflows. More than $18 billion was invested in July
and August alone!
To see what everyone is so excited about,
click here.
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