Increasing Shortage of Greater Fools ~ The Risk Averse Alert

Friday, May 20, 2011

Increasing Shortage of Greater Fools

More evidence suggesting that, the market has not yet completed its advance off late-June 2010 bottom...


The percentage of bullish investors taken from the American Association of Individual Investors weekly poll of investor sentiment is superimposed on a chart of the S&P 500 over the past six months. May 18th's reading of 26.7% rather suggests upcoming the anticipated fifth wave of five waves up from late-June 2010.

That being the short and sweet of it, let's not overlook the all-important context of this rather low reading of bullishness among individual investors, particularly at this point in time following a substantial rally, first from mid-March, then late-June 2010 and March '09 before that. Has bullishness waned, first mid-March, then now, in a climate of expanding wealth, or in a recovery of former wealth? No doubt, it is more likely the latter.

This contextual distinction segues to a recollection of circumstance with sentiment back in '08. You might remember that, during the market's bounce of August '08 and into early-September bullish sentiment had recovered off its July low, yet still was nothing to write home about, as its increase was by no means extreme. Just prior to the collapse of Lehman Brothers on September 15th one could have viewed then still-muted bullish sentiment amidst a recovering market (NASDAQ's bounce was particularly notable) as a sure sign the market was about to go higher. Of course, this proved dead wrong.

The point is that, sentiment, generally speaking, is bound to behave differently in a bear market than in a bull market. Moreover, sentiment is likely to resonate with the market's performance over years past. Indeed, sentiment can echo investor experiences extending back decades.

Today's remarkably low bullish sentiment among individual investors speaks plainly about the shallow depth of buy-side interest: a quandary consistently evidenced by diminishing volume of shares traded during advancing periods since March '09. Thus, we have confirmation that, contraction in buying power underlying the market's advance is only likely to continue. With an increasing shortage of greater fools on the horizon, then, there's but one reasonable forecast ... and it remains Dow 3600.

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