Thursday, June 9, 2011

the rear view mirror

As the saying goes, gloom among investors and the public is now so thick you can cut it with a knife.

The chart right above this post shows the 30 year record of people's expectations that their income will increase during the coming year. For the past two years this percentage has been hovering at its lowest levels of the past 30 years. During this time of pessimism the stock market has steadily advanced.

Of more immediate interest is the middle chart. It shows the results of the weekly survey of investor sentiment conducted by the American Association of Individual Investors. The blue line is the weekly ratio of the number of bears divided by the number of bulls plus the number of bears. The higher the number the more bearish is the average investor. The five week moving average of this poll is depicted by the red line.

On a moving average basis AAII investor sentiment is the most bearish it has been during the past 18 months, and is even more bearish that at last year's July low which ended a 17% drop. This is remarkable because the S&P 500 has dropped barely 9% from its May high.

In fact the latest drop looks perfectly normal in the context of corrections within this bull market (blue dash rectangles in top chart). The 200 day moving average (red line in top chart) is rising strongly and the market is well above it. The S&P is also well below its 50 day moving average.

This combination of circumstances is an buying opportunity for the aggressive contrarian. In my view the aggressive contrarian would have assumed an above average long position near the April 2011 lows after dropping to only a normal long position last November. So while no new buying is possible I think this above average long position should be held. The S&P should soon move to new highs for the bull market.

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