Skeptical Sentiment In A Sideways Market: Bullish Or Bearish For Stocks?

Skeptical Sentiment – What Could It Mean?

As shown in the chart below, the S&P 500 has made very little progress over the past five months.

It seems logical the longer stocks “go nowhere”, the more skeptical investors become. What does history tell us about waning enthusiasm for stocks that occurs over several weeks? From Barron’s:

Just 25% of respondents to the latest American Association of Individual Investors sentiment survey called themselves bullish [2015]. That’s the seventh week in a row that the percentage of bulls was under the long-term average of 30%, the longest such streak since 2003. Bill Smead, portfolio manager of the Smead Value fund (ticker: SMVLX), notes that the 2002 reading came “after tech stocks got crushed in the three preceding years and the index had declined more than 40% from peak to trough.” Now, despite everything that could go wrong—including a Fed interest-rate hike and the possibility of Greece leaving the euro zone—he believes the negative sentiment is bullish for stocks.

What Happened Last Time?

We have just had “the longest streak since 2003” of investor skepticism. Was 2003 a bad time to invest? Assume we invested on June 30, 2003 or halfway through a year marked by a long period of skepticism similar to 2015. How would we have done in stocks? The answer is shown in the chart below.

But, 2003 Was A Different Time?

Yes, it was. The same is true for any historical reference. We did not pick 2003…history picked 2003 since it was the last time the AAII survey showed the percentage of bulls below 30% for seven consecutive weeks. In 2015, we just saw the seventh consecutive week of bulls below 30%. The chart below provides some additional insight related to the question:

Even in the face of skepticism, was 2003 a good year to invest?

Do Other Facts Support The Bullish Case?

Is sentiment a reason alone to invest? No, it is best to make decisions based on numerous inputs. Do other facts support the bullish case? You can decide after viewing this week’s stock market video, which features recent action in small caps (IWM), consumer discretionary stocks (XLY), the S&P 500, and the healthcare sector (XLV).

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Disclosure: This post contains the current opinions of the author but not necessarily those of Ciovacco Capital Management. The opinions are subject to change ...

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