Market Sentiment Leaves Me Bullish

bull market street sign up

I have a confession to make.

When I try to divine short-term market movements, I have a distinct weakness for this fuzzy thing called “market sentiment.”

As a member of the exclusive clan of Chartered Financial Analysts (CFAs) — schooled as we are in the rigors of modern quantitative finance — that admission is borderline heresy.

In world awash and bedazzled by complex financial models, “market sentiment” doesn’t have the perceived legitimacy of, say, looking at a company’s balance sheet, or income statements or cash flows.

Yet, the elephant in the room is that the short-term prices of financial assets are driven by little else.

And thanks to sites like SentimenTrader, it turns out market sentiment can be quantified — sliced and diced into numbers, graphs and charts just like any fundamental data can.

And before you dismiss market sentiment as yet another incarnation of spurious financial astrology, consider this. Warren Buffett earned his investment spurs as a Ben Graham disciple and a value investor. And Buffett has said that the single-most-important thing he has ever read was Graham’s chapter on Mr. Market’s Moodswings in “The Intelligent Investor.”

In that chapter, Graham compares the market to a manic-depressive. Some days, Mr. Market is euphoric. On other days, he’s very depressed. If you catch him on a euphoric day, he wants a very high price for his shares. If he’s in one of his down moods, he’s willing to sell you his shares for a pittance. Mr. Market highlights the one thing you can predict with certainty about financial markets: investors will always overreact to events — whether positive or negative.

Exclusive  Best Buy Warns Holiday Discounts Will Squeeze Margins

For my money, it’s a darn good way of looking at things.

What Sentiment Tells You about Today’s Market

Investors came into 2014 with a chipper attitude. Whether investment newsletter writers, fund managers or mom ‘n pop retail investors, everyone was bullish on the market.

Of course, investors had reasons to be cheerful. The major U.S. indexes soared 30% or so in 2013 and both the Dow and S&P 500 hit record highs. The market’s rise was remarkably smooth and resilient. Even the beginning of the end of Quantitative Easing (QE) couldn’t slay the market bull. As Morgan Stanley’s market strategist Adam Parker, put it, “The only thing people are worried about is that no one is worried about anything. That isn’t a real worry.”

Truth be told, it is comments like Parker’s that have me worried.

Last week, many of my favorite sentiment indicators hit levels that have often preceded sharp pullbacks.

SentimenTrader’s index of “dumb money” confidence exceeded that of the “smart money” by a level seen only three other times over the past 27 years. No wonder a handful of value-oriented mutual fund managers have ramped up their funds’ allocation to cash, leaving stock exposure at the lowest level in 13 years. That’s also why I recommended to subscribers of my short-term trading services, Bull Market Alert and Triple Digit Trader, that they reduce their exposure to the market.

Bull Markets Climb a ‘Wall of Worry’

As I’ve written before, I prefer to buy assets when bad news hits the cover of the Economist magazine. As Buffett says, “the market pays dearly for a cheery consensus.”

Exclusive  Justice Scalia’s Accomplishments Cast Positive Light on Italian Americans

The last five years are a terrific case study of how financial markets “climb a wall of worry.” Remember Europe’s coming implosion; the looming U.S. government bankruptcy; or my favorite, China’s coming collapse? Yet, with U.S. stock prices up 176% since March 2009, this has been one of two great bull markets since the dotcom bust.

The irony, of course, is that even as investors turn bullish, stocks actually become riskier. After last year’s big run in the United States, valuations jumped. In 2013, the price/earnings ratio on the S&P 500 rose to 15.4 times estimated earnings for the next 12 months. That’s far above a 10-year average of 14.

So what’s my outlook based on today’s market sentiment?

Despite my caution over the short term, I am firmly in the bull camp over the coming years.

Right now, investors’ optimism is based on a collective sigh of relief that the worst is over.

On the one hand, that means it will take genuine good fundamental news — and not just the absence of financial crises — to keep stock prices going higher.

On the other, even as the U.S. market hits record highs, global stock markets are hardly partying like it’s 1999.

And as John Templeton said, “Bullmarkets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

And for all of the talk of “bubbles,” I think we are barely out of the “pessimism” phase of Templeton’s formulation.

My advice?

Endure the inevitable short-term market corrections stoically.

Exclusive  Technology Trends Will Drive 2014 Investing

And as the stiff-upper-lipped Brits say, “Keep calm and carry on.”

In case you missed it, I encourage you to read my e-letter column posted last week about the Obama presidency disappointing as expected. I also invite you to comment in the space provided below.

Like This Article?
Now Get Nick's FREE Special Report:
Alternative Investing: Investing in Timber

Global Guru editor Nicholas Vardy reveals why investing in timber may be one of the best long-term portfolio strategies you'll find today.

Get Access to the Report, 100% FREE

previous article

BYD Co. is a Chinese automaker that will begin to introduce its autos to the U.S. market in 2015.


Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen publishes 4 different investment newsletter advisories, including the award-winning Forecasts & Strategies, which has beaten the market over the last 15 years.

Product Details

  • Forecasts & Strategies
  • Skousen High Income Alert
  • Fast Money Alert
  • Five Star Trader
About Mark Skousen

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays. Bryan's four newsletter and trading services include:

Product Details

  • Cash Machine
  • Premium Income (exclusively for subscribers of Cash Machine)
  • Quick Income Trader
  • Instant Income Trader
About Bryan Perry

Nicholas Vardy

A Stanford and Harvard Law graduate, Nicholas Vardy scours over 40 different global markets every day to uncover new profit opportunities for subscribers. His 3 advisories and trading services include:

Product Details

  • The Alpha Investor Letter
  • Bull Market Alert
  • Alpha Algorithm
About Nicholas Vardy

Doug Fabian

A 30-year Wall Street veteran and famed market timer, Doug Fabian is one the nation's foremost experts on ETFs (Exchange Traded Funds). His two ETF-focused advisories include:

Product Details

  • Successful ETF Investing
  • ETF Trader's Edge
About Doug Fabian

Bob Carlson

In Bob's monthly newsletter, Retirement Watch, he provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details


Used by financial advisors and individual investors all over the world, is the premier provider and one-stop shop for dividend information and research. Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

Product Details