Surveys and experts tracking investor sentiment suggest that, 13 months after stocks began a historic advance, the market's mood could be at a turning point from pessimism to optimism.
Yes, after a 79% jump in the S&P 500 index from its March 2009 low, investors may finally be starting to feel good about the stock market. Measures of investor sentiment tend to become more bullish well after a stock market rally has already begun, as large numbers of equity skeptics are gradually persuaded to become stock buyers when the market moves ever higher.
Stock pros are watching individual investors carefully for overconfidence, which could be a sign the rally is ending. Investors often feel the most bullish just before the market peaks, just as they feel most bearish just before stocks start a new rally.
"Historically, [market sentiment] is a contrary indicator," says John Gray, editor of Investors Intelligence, a service that tracks the sentiment of independent investment advisers.
On Apr. 21, Investors Intelligence's weekly survey of 130 investment newsletters showed the percentage of advisers bullish on the stock market rising 2.2 points, to 53.3%. Bears fell from 18.9% to 17.4%. The "danger zone for bullishness" is 55% to 60%, Gray says. "We're approaching that now."
A popular survey of individual investors, however, continues to show skepticism and bearishness. The latest American Association of Individual Investors' Sentiment survey, released Apr. 22, showed bullishness falling from 48.5% to 38.1% over the past week. That's barely above the survey's bearishness reading of 34.3%, up from 29.7% the previous week. The remaining respondents classified themselves as neutral.
Bruce Bittles, chief investment strategist at Robert W. Baird, sees a split between professionals—who recognize the strength of the economic recovery—and the general public, which remains pessimistic despite a 79% rise in the S&P 500 since the broad index's March 2009 low.
"We have optimism, but it's not the kind of excessive or extreme optimism you see" at a market top, Bittles says. That's a good sign for the rally, he says: "It's rare for markets to have these runs and investors remain skeptical."
Such surveys measure what investors and advisers are saying. Fund-flow data measure what investors are doing with their money.
According to TrimTabs Investment Research, investors have pulled $18 billion from U.S. equity mutual funds in the past 12 months, even as stocks kept pushing higher. At the same time, skittish investors put $403.1 billion into the relative safety of bond mutual funds, including $55.4 billion since the beginning of March.
The recent flow data for stock funds are more mixed. Investors pulled $5 billion from U.S. equity mutual funds in February, but $4 billion has trickled back into those funds since the beginning of March.
Michael Shinnick, a portfolio manager at Wasatch Advisors, says many retail investors, burned by the two bear markets in the past decade, are simply staying away from stocks entirely. With many baby boomers approaching retirement, "they're approaching the market with extreme caution," Shinnick says.
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