Bearish Sentiment

Last week, the S&P500 lost 1.1%, registering its first notable weekly decline since early August. Sure enough, volume rose, in direct contrast to more frequent weeks when stocks rise on declining volume. Clearly, the implication is that there’s a lot of pent-up selling pressure and that volume could explode when or if stocks ever sold off meaningfully. Also unsurprisingly, volatility jumped somewhat, as one would expect in a week in which prices dropped.

Technically, last week’s decline did very little to alleviate the extremely overbought condition of the S&P, on both the daily and the weekly charts. Stock prices continue to drift higher into record-setting territory, without so much as a mild 10% correction since mid-2012. At the same time however, breadth is not as strong as it was during earlier record-setting moves. For example, the percent of stocks above their 150 day moving average is far lower than it was in much of 2013, when stocks were setting record highs,,,,but at prices far below where they are today. Once again, this means that index prices are climbing not because most individual stocks are rising, but because several key leadership stocks are risking and pushing the overall index higher. In fact, in the NASDAQ, a big percentage of stocks are in bear markets, despite the strong overall index price level.

US macro news last week was, on balance, disappointing. While consumer credit growth and consumer sentiment beat expectations, most everything else missed. Job openings (from the JOLTS) survey were lower than expected. Wholesale trade badly missed, and so did initial jobless claims. Retail sales only met consensus forecasts.

Finally, an interesting development is building up in the world of investor sentiment, especially among investment advisors. Investors Intelligence has been monitoring, on a weekly basis, investors sentiment (the percent who are bears and the percent who are bulls) for several decades. And while we’ve noted in the past that the percent who are bears had dipped below 20% during various times in 2013, the latest development is even more stunning—the percent who are bears has now dropped below 15%……..specifically to 14%.

On the surface, this development looks positive. Almost everyone now is bullish. And if everyone is bullish, then a lot of smart people seem to agree that things–broadly speaking–look good for stocks going forward. So, if any single investor is bullish, then he or she would be joining the vast majority of others who think the same thing.

On the other hand, the percent of bears at 14% has now fallen to lows not seen in over 20 years. And this begs the question—if everyone is already bullish (and presumably a buyer of stocks), then who’s left to enter into the market to buy stocks and propel prices even higher?

And an even more worrisome question is this—since most everyone is already bullish, if some negative shock were to hit the markets, who’s going to be doing the buying if most everyone who was bullish decides to become a seller?

The more one thinks about this question, the more one is left with the dreadful conclusion that if a panic were to hit stock markets, then there would be almost nobody available to buy—-at the old record-high prices.

Would buyers emerge eventually? Sure, but they always emerge only after prices have fallen….substantially.


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