Another Reason Why We've Rallied

Another reason we've rallied is that investor sentiment has just plain stunk! Bespoke Investments pointed this out in this post last week. According to Bespoke: "As shown in the top chart above bearish sentiment among investment advisers (Investors Intelligence) increased {last} week and is now tied for its highest level since April 2009 (35.6%). While bearish sentiment among individual investors (AAII) is not at a one year high, we did see an increase as the percentage of investors considering themselves bearish which now stands at 45%."

Investor sentiment is a notorious contrary indicator. We've looked at this in the past by tracking mutual fund inflows and outflows. While I do not have the exact figures on where money has gone so far this year, I do know that in the past three months there has been a mass exodus away from equity mutual funds over to bond mutual funds. All of this money sitting on the sidelines is a powder keg sitting under stocks. Now I'll say upfront that I don't know when this money will return to the markets. But history indicates that at some point investors will look for returns higher than the almost 0% rate that cash or short term bonds are paying out right now.

These sentiment numbers add to the body of evidence that stocks could rally higher into year end than most people expect. That could especially be the case if we get beyond the seasonal fall weakness. A fall catalyst for an advance could be investors looking towards the fall elections and a potential change in control of Congress. Even if the Democrats maintain their majorities the thinking goes along these lines that the Democrats will be in a much weaker position next year and will have to be more pro-business and more interested in getting the economy {and jobs} recovering.