Stock Market: Investor Sentiment And Other False Indicators Of A Bottom

So we had a big bounce last week. Major US indices were up at least 10% this week. Overseas actions were also strong. This bounce could be caused by the supposed “good news” that the media passed on to the masses, but it was also largely caused by the deeply oversold conditions that the market was in.

Now the question is that is this the bottom. Is this finally the time to be a contrarian and say all the “dumb” money sold and it’s time to buy stocks. Was 666 really the bottom on the SP500 (^GSPC) and it’s all going to be uphill from here with corrections along the way?

Based on the AAII (American Association of Individual Investors) Sentiment Index, a record low was registered as of March 4th 2009. 70% of those surveyed were bearish and only 19% see the light at the end of the tunnel.

Data source: SentimentTrade.com

But how should we interpret this record low? First of all, this is a record if we only go back to the 1987. How does this compare say with 1929 to 1932? How many people were bearish when the market finally bottomed during the summer of 1932?

Second question is that unless we see a fast change in sentiment with percentage of bearish investors go from 60% to 10% within a matter of a few months such as back in 2002 to 2003, we cannot conclude that a simple sentiment record low from a short historical time frame make this SP500 666 level a true capitulation.

KhronoStock expects eventually the AAII Sentiment index should go up to 90% bearish in order to make a true market bottom. When absolutely no one wants to buy or can afford to buy stocks, that is finally the time to get into the stock market.

The problem with all the current sentiment analysis is that NO ONE believes in a second Great Depression. That by itself is a sign that the market has not hit a bottom yet. To be a contrarian at the wrong time can be very damaging. Warren Buffet learned his lesson. So did Bill Miller among other value investors.

KhronoStock believes that at this point, the only way that the United States and the world can get out of the current financial and economic mess is to go through the worst economic depression possibly in modern history. Thus, people who buy stocks in the midst of this transition to the global economic depression are only catching a falling knife.

Subscribe by RSS Subscribe by Email