Sentiment Data Points To Higher Market

| September 19, 2011 | 0 Comments

The latest consumer sentiment numbers came out on Friday.  Thomson Reuters and the University of Michigan provided preliminary figures from the widely followed consumer sentiment index.

And the numbers are encouraging.

The data show consumer confidence crept up from 55.7 in August to 57.8 in September.  While the index is still mired at extremely low levels, the uptick is good news for investors.

Remember, consumer sentiment plunged in August to the lowest levels seen since May of 1980.  Many were expecting the indicator to drop modestly from 63.7 in July to 62.0 in August.

But it came in at an astonishingly low 54.9.

You may recall I talked about this data in my August 15th article, Is Heavy Consumer Pessimism Actually Good For Stocks?  I explained how extremely low readings in consumer sentiment have often coincided with market bottoms.

Here’s what I said…

“You see, whenever consumer confidence has fallen to this level, the market has mounted huge rallies.  In 1980, the S&P 500 turned on a dime and put up gains of 36%.  And after consumer confidence plunged in March 2009, the blue-chip index bottomed and then soared 105% over the next two years.”

Well, the September consumer confidence number appears to support my argument.  By moving higher this month, the sentiment index may have begun a major reversal.  Of course, only time will tell if sentiment levels are headed higher, but for now it looks like the August number was the bottom.

And since then, the market’s moved higher as well…

The S&P 500 hit a low of 1,101 on August 9th.  This past Friday, the large cap index closed at 1,216.  That’s a rise of 10.4% in just five weeks’ time.

Still not convinced?

Check out the latest investor sentiment data…

Investors Intelligence (II) and the American Association of Individual Investors (AAII) both track investor sentiment on a weekly basis.  Last week, numbers from each survey showed the percentage of bearish investors was higher than the percentage of bullish investors.

It was the first time this has happened since September 2, 2010.

Of course, we all remember what happened last September.  The S&P 500 went on a tear, climbing 22% over the next six months.

At face value, the investor sentiment numbers are a bit frightening.  They seem to indicate we’re in for more stock market losses in the months ahead.

But these surveys, like the Michigan survey, are contrary indicators.  Time and again, deeply negative readings on consumer and investor sentiment coincide with market bottoms.

In fact, our friends over at Bespoke Investment Group just completed a study which illustrates this point.

They went back as far as 1987 and calculated the S&P 500’s one week, one month, three month, and six month returns following weeks where the bears outnumbered the bulls in the II and AAII polls.  Then, they compared those returns to the S&P 500’s performance following periods when the bulls outnumbered the bears in each poll and when the two polls had mixed results.

Bespoke’s findings are enlightening to say the least…

“[T]he S&P 500’s average performance is greatest for each time frame when bears exceed bulls in both surveys compared to any other combination.  In fact, the average returns of the S&P 500 when bears exceed bulls in each poll is more than twice the average return of any other combination (bulls exceed bears in both polls or mixed polls).” (emphasis added.)

Bespoke went on to say…

“In terms of the frequency of positive returns, one month, three months, and six months following weeks where both polls have more bears than bulls, the S&P 500 has seen positive returns at least 70% of the time.” (emphasis added.)

Based on this extensive analysis of investor sentiment and S&P 500 performance, we’re left with only one conclusion.  The market is much more likely than not to head higher in the weeks and months ahead.

So, when you’re reading all those doom and gloom predictions in the mainstream financial news, don’t let them scare you out of the market. You can simply smile to yourself and take comfort in knowing the odds favor higher market returns over the near term.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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