Small investors are bearish about the stock market, but don’t worry. A bearish sentiment from individual investors may mean this is a perfect time to stake new positions in the stock market.
First, the data: the most recent data from the American Association of Individual Investors shows an above normal level of pessimism about the stock market.
Almost 39 percent of respondents to the weekly AAII investor sentiment survey said they were bearish about where stock prices would be in six months, according to the results for the week of April 19. That’s way below the long-term average of 30 percent.
[See: Buy and Hold: Be an Investing Expert Like Warren Buffett.]
The same survey showed that 26 percent of small investors were bullish, a lot lower than the long-term average of 38 percent.
Contrary indicator. Does that mean that the market will go down? Probably not.
“Individual investors tend to be a contrary indicator for market direction,” says Lila Murphy, a portfolio manager at Federated Investors in Dallas, Texas. When small investors get bearish then the market is more likely to rally than fall. It works the other way around also. When mom and pop are bullish on stocks, then expect the market to fall.
Murphy explains the reasons why such investors might be less optimistic now. “The individual investor is looking at lack of wage growth,” she says. Pay raises aren’t what they used to be in the 1990s, or the years before the financial crisis.
Still, the smart money, also known as the institutional investors, see the world somewhat differently.
“My sense of things is that now we have gotten through a key part of the French elections there is a higher degree of certainty that makes institutional investors a bit more bullish,” Murphy says. Professional investors tend to like clarity or at least some level of certainty when they decide the invest.
She says there are other reasons to be bullish, too. “I think it’s pretty likely that President [Donald] Trump will get some sort of tax reform over the goal line and there is the possibility of some sort of Obamacare reform,” she says.
Climbing the wall of worry. Sentiment is one thing to look at, but actions speak loudly also. In the case of the stock market, the question to answer is simple: How much new money is coming into the market? Not so much.
“No net new money has come into U.S. stocks since the U.S. crisis,” says Liz Ann Sonders, chief investment strategist at Charles Schwab in New York. The cumulative total amount of money flowing out of mutual funds and exchange-traded funds has exceeded the amount flowing into such funds, according to her analysis.
[See: 7 Socially Responsible ETFs for Investors of All Stripes.]
That is despite the fact that stocks have done well since the end of the financial crisis. The Standard & Poor’s 500 index has tripled since the lows in early 2009, not including the benefits from dividends.
Sonders says the lack of commitment by fund investors to sticking money into the market is actually a good thing. “I think that has been a classic wall of worry and suggest there is fuel on the sidelines,” she says.
Another view. Not everyone is as convinced by the bullish outlook for the market.
“When margin is at a record high that is bearish, the last reading I saw is that it had a record high at end of February,” says Rich Suttmeier, founder & CEO of Global Market Consultants in Land O’Lakes, Florida. “That’s usually been a good read for when the market is high.”
Margin debt is money that is borrowed to buy securities. At the end of February, debt used for buying securities totaled $528 billion, according to data from the NYSE.
Suttmeier explains that when the price of securities drops then the borrowers may receive what is known as a margin call. It means that the investors who borrowed will have to send more cash to a broker or sell what stocks they own, or possibly do both.
[See: 9 of the Market’s Best Growth Stocks.]
In a bad-case scenario, margin calls can lead to more selling in the market which then leads to more margin calls and possibly more selling.
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Bad Sentiment From Small Investors Means Good Gains Ahead originally appeared on usnews.com
