The latest victim of the rampaging bull market in stocks is the Wall Street maxim that glowing investor sentiment is a sell signal.
Throughout 2021, a range of surveys, fund-flow figures and options activity have shown investors big and small to be exceptionally bullish. Yet major U.S. indexes continue to rally to records, putting the Dow Jones Industrial Average up a healthy 13% for 2021.
Analysts have long relied on sentiment and related data on risk-taking as contrarian indicators. By the time friends, colleagues and strangers are plowing money into stocks and telling you about it, it’s time to run for cover, to this way of thinking. Likewise, when everyone is selling, you should be buying with both hands.
But for much of this year, it has paid enormous dividends to stay with the herd. It’s the latest departure from the tried and true in a year that already has brought soaring meme stocks, record lumber prices and a bond-market rally in the face of rising inflation. In short, now is when analysts and portfolio managers are starting to wonder whether it really is different this time.
“We’ve been throwing up our hands for a while,” said
Jason Goepfert,
president of Sundial Capital Research. “For whatever the reason, the market is just rolling over all these historical indicators that before had a very consistent track record.”
In the coming week, traders will parse data on housing starts and building permits, as well as earnings from companies including Johnson & Johnson and
United Airlines Holdings Inc.,
for further clues about pricing pressures.
They will also be watching to see if sentiment oscillates. Recently, signs of waning sentiment have begun peeking through some indicators, though bullishness largely remains above or near long-term averages.
Americans’ stock allocations reached nearly 60% at the end of March, a figure just below the all-time high of 61.7% reached during the dot-com bubble, according to data from Ned Davis Research stretching back to 1951.
A July survey by retail brokerage E*Trade found that bullishness among the platform’s individual investors recently hit more than a three-year high, rising to 65%. Additionally, the often-watched equity put-call ratio—which measures the volume of bearish options bets placed on stocks versus bullish ones—earlier this year notched sustained levels of optimism not seen since 2000.
The source of the optimism that has fueled 39 records this year on the S&P 500 isn’t hard to divine. Most notably, there’s an unusual and powerful blend of stimulus and easy monetary policy that has left investors flush with cash and with few sources of steady investment returns. The entrance of a new…
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