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Weekly Commentary
September 20, 2010
The
Markets
Individual
investors are having a hard time deciding if they want to be bullish or bearish
on the stock market.
The
American Association of Individual Investors is a non-profit association of
150,000 investors. Each week, the association compiles a sentiment survey of
its members which measures the percentage of individual investors who are
bullish, bearish, or neutral on the stock market for the next six months.
Lately, their sentiment numbers have been all over the place.
For
the week ending September 15, 2010, the bullish sentiment increased to 50.9%,
which was the second highest reading
in two years, according to Bespoke Investment Group. That was also well above
the long-term average bullish reading of 39.0%. However, just three weeks
earlier, the bullish sentiment was only 20.7%, which was its second lowest reading in the past two years.
So,
what changed in the past three weeks? The simple answer is a very nice stock
market rally.
Between
August 26 and September 16 -- the three weeks between the two surveys -- the
S&P 500 index rose 7.4%, according to data from Yahoo! That rally helped
turn many of the bears in the survey to bulls.
While
this weekly sentiment survey is widely reported in the media, it is basically
of little value unless it is at an extreme level of bullishness or bearishness.
According to MarketGauge.com, bullish readings above 70.0%, "have been timely
predictors of corrections in an up trend," while bullish readings below 30.0% in
a weak market, "indicate a level of fear and capitulation by individual
investors which is common at market lows."
In
other words, extreme sentiment readings may actually be a contrarian indicator of where the market is heading. The takeaway
is, when individual investors get extremely bullish or bearish, it may be best
to do just the opposite!
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Data as
of 9/17/10
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1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
| |
Standard
& Poor's 500 (Domestic Stocks)
|
1.5%
|
0.9%
|
5.4%
|
-8.7%
|
-1.8%
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-2.5%
| |
DJ
Global ex US (Foreign Stocks)
|
1.7
|
0.2
|
2.0
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-8.2
|
1.9
|
2.0
| |
10-year
Treasury Note (Yield Only)
|
2.8
|
N/A
|
3.4
|
4.5
|
4.3
|
5.9
| |
Gold (per
ounce)
|
2.2
|
15.4
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25.1
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21.0
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22.4
|
16.7
| |
DJ-UBS
Commodity Index
|
2.1
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-0.6
|
7.3
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-7.4
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-4.5
|
2.2
| |
DJ
Equity All REIT TR Index
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1.9
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20.6
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27.0
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-4.0
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2.4
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11.0
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Notes:
S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude
reinvested dividends (gold does not pay a dividend) and the three-, five-, and
10-year returns are annualized; the DJ Equity All REIT TR Index does include
reinvested dividends and the three-, five-, and 10-year returns are annualized;
and the 10-year Treasury Note is simply the yield at the close of the day on
each of the historical time periods.
Sources:
Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee
of future results. Indices are unmanaged
and cannot be invested into directly. N/A means not applicable or not available.
SUCCESSFUL INVESTING IS NOT
LIKE DRAWING A STRAIGHT LINE from
point A to point B. Rather, it's more like being able to connect the zig-zag
dots along the way.
Steve Jobs, the co-founder
of Apple Computer, spoke to the graduating students at Stanford University in
2005 and told a story about how on a whim, he dropped in on a calligraphy class
while he was attending Reed College back in the early 1970s. At the time, he
found the class utterly fascinating, but totally useless. It wasn't until 10
years later, when he was designing the Macintosh computer, that he was able to
connect the dots. He decided to take what he learned about calligraphy and
incorporate it into the computer. The result was the Macintosh, which became
the first computer with beautiful typography. It became a huge hit in the
desktop publishing market and helped launch Apple into a multi-billion dollar
company.
Like Jobs connecting
calligraphy to the computer, there are many "dots" on the investment landscape
that, when connected, help draw a picture of the health of the financial
markets. Here are a few "dots" that we are monitoring:
· Gold
setting a new all-time record high last week, according to Financial Times
· U.S.
interest rates near historical lows, according to The Wall Street Journal
· Inflation
nearly non-existent in the U.S., according to MarketWatch
· The
U.S. dollar near a 15-year low against the Japanese Yen, according to Bloomberg
· Trillion-dollar
U.S. budget deficits, according to Bloomberg
· The
U.S. unemployment rate near a 27-year high, according to MarketWatch
· The
rise of the Tea Party movement, according to Barron's
· The
Federal Reserve engaging in quantitative easing, according to CNBC
What are these "dots"
telling us?
These "dots" suggest that numerous
cross-currents are buffeting the markets and, given how inter-related the world
is, we cannot view these "dots" in isolation. As your advisor, we continue to
analyze how to connect them over the long-term so you can benefit from however
"zig-zaggy" the line looks.
Weekly
Focus - Think About It
"When
nothing is sure, everything is possible." --Margaret
Drabble
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