The AAII sentiment survey dated July 12, 2012 showed the lowest level of bullishness since the October 2010 market bottom. Of course, the dour October mood was inspired by the big sell-off from the April 2010 high that preceded it.
Nothing makes investors more bearish than having just gotten their collective bullish asses kicked. That was especially true after a series of false, fit and start rallies in May, June and July that year.
That exact point of maximum pessimism marked the beginning of an almost uninterrupted more than 30% rally which lasted six months. Those who missed the entry point never got a ‘fill the gap’ decline to get invested. You paid a big price for being out at the turning point.
The July 12th low in bullishness by ‘mom and pop’ traders followed a significant six-day sell-off after what many suspected was a false start rebound in June.
Only time will tell if we’re at the start of another multi-month, large percentage rebound in the broad averages. What’s already history is the rebound to above 13,000 on the DJIA for the first time since early May.
Professional financial advisors are often guilty of giving clients what they want rather than what they need. Most private investors match the AAII profile. They ask for whatever’s just finished doing the best while shunning asset classes that have recently done badly but offer the best values and the chance to rebound strongly.
SentimenTrader’s excellent chart shows how financial advisors’ recommended stock allocation is now lower than the 2009 lows. Conversely, their weighting towards bonds (offering the lowest coupon rates in our lifetimes) is now at all-time highs. This is nothing short of insanity.
Everything in nature regresses from extremes towards normal over time. Demand for stock will rise again. Those willing to lend money at negative real interest rates are sure to diminish in magnitude.
When will the tide turn? Has the train already left the station? Nobody can say for sure. I defer to The Bard for the answer to that question.
“Better three hours too soon, than one minute too late.”
Failing to plan is planning to fail.
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