Them Bears Were to Wall to Wall

We continue to be surprised at the relative lack of bullish commentary on various blog sites that we read and generally within other forms of media. There seems to be a general reluctance to believe in the rally of the equity market and that with any trip that equities make, yes it is normal for equities not to move in a straight line fashion, sleepy bears quickly spring into life claiming that “this is it”, this is the top of the market and now we are off to retest the lows of March!

We don’t want have preconceived ideas because once you become married to an idea there is a natural human tendency to defend the idea (or should we say ones ego) even in the face of credible evidence to the contrary. However, that being said we do get this feeling that the equity market (DOW, S&P etc) is still more likely to surprise folk on the upside rather than downside.

We would just like to highlight the latest AAII sentiment survey reading. Subscribers to the AAII are asked whether or not they think the stock market will be higher or lower six months from now. They are able to answer,” higher”, “lower”, or “don’t know”. Below is the graph of all those who have answered “lower” since the survey started way back in 1987.

Now in essence as of August 27^th, when the S&P 500 closed at 1035 49% of respondents thought that the US stock market would be lower by year end. The long term average is 38%.
So even though the S&P 500 was higher by 20% for the year there was still a very high ratio of respondents who believe that the stock market will be lower not higher by year end. Of course the percentage of respondents to the survey who are bearish (49%) is likely to be somewhat higher now given the S&P has fallen by 3.5%!

As contrarians we know that the higher the ratio of bears to bulls the higher the probability that the market will continue to advance. Perhaps it is the persistent high ratio of bears to bulls over the last 5 months that has enabled the S&P 500 to rally some 50%.

More food for thought, what say the S&P falls another 5% over the coming days? How many more bears will come out of hiding? We think that the odds of significant downside in the S&P (i.e. greater than 10%) are low and that one should view any weakness as a buying opportunity.