Investors Remain Optimistic in Face of Market Pullback

All good things must come to an end. Last month I mentioned the fact that the broad market indexes were in the midst of a 10-week run of gains. Like clockwork, the markets took a breather, logging two straight weeks of declines. Predictably, investor sentiment dipped along with the markets. However, bullish sentiment did not fall below its long-term historical average (something it hasn’t done since late August). Over each of the last two weeks, investors have been feeling better about the future prospects of the market, pushing bullish sentiment higher.

In The Wall Street Journal’s December 1“Heard on the Street” column, Richard Barley wondered whether investors are asleep at the wheel. Barley pointed to the euro zone crisis, China’s tightening monetary policy, and the Federal Reserve’s lack of a coherent strategy as reasons why the markets should falter. Yet investors are still flocking to equities over bonds. Barley reasoned that there are several reasons why equities remain attractive: solid global economic growth, stocks’ “cheapness” relative to government bonds and corporate debt, and the fact that loose monetary policies across the globe could spur inflation that would favor stocks over bonds.

On the home front, investors are still waiting to see whether the Bush-era tax cuts will be extended. This could play a major role in the investment strategies of countless individuals and, as a result, be a driving force beyond the market in the coming weeks.

Results as of December 2, 2010:

Bullish: 49.7%

Neutral: 24.1%

Bearish: 26.2%

To participate in the AAII Sentiment Survey, or to view historical survey results, click on the link below:

http://www.aaii.com/sentimentsurvey

Long-Term Average and Extreme Values

Bullish:

Average: 39.0%, Max: 75.0% (1/6/2000), Min: 12.0% (11/16/1990)

Neutral:

Average: 30.7%, Max: 62.0% (6/3/1988), Min: 7.7% (10/9/2008)

Bearish:

Average: 30.3%, Max: 70.3% (3/5/2009), Min: 6.0% (8/21/1987)