Gurus Are Still Way Too Bullish

02/02/2009 1:00 pm EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, chairman of Schaeffer’s Investment Research, writes in the Option Advisor that too many Wall Street strategists are too optimistic—a bad sign.

Eleven prominent investment strategists were polled for [a recent] article. Ten saw the market rising in 2009; one saw the market declining by 3%.
The sentence [from the survey],  “it would be risky to be out of the market right now” is, in my opinion, characteristic of the thinking of too many investors—namely, that the risk these days is that of missing a big rally rather than that of major additional capital losses.

According to CNBC’s Trillion Dollar Survey of 49 of the nation’s top money managers, investment strategists, and professional economists, 95% expect the Standard & Poor’s 500 index to gain 5% or more in 200, 26% expect the S&P to gain 20% or more, [and] 0% expect the S&P to be down 20% or more.

The most popular bullish argument was that the various fiscal and monetary stimuli will jump-start the economy. Others stated that we were closer to the end of the recession than most anticipate; that this is the time to buy a la Warren Buffett (“buy when others are fearful”), and that the risk is not being in the equity markets.

It would be foolish to imply that there is no fear out there, or that there are no bears out there. A total absence of negativity in the current economic environment would, in fact, be indicative of a mass psychosis. At the same time, it is natural for people in dire circumstances to want to hold out hope for a better future.

But I see the sentiment backdrop detailed above as very dangerous for the market. We’re about to move out of the most positive seasonal three-month period (November-January), and the market has very little to show for it in a recovery from its lows. We remain in the throes of a bear market from a technical perspective, and economic recovery is a vague promise with nothing at all grounded in current reality.

When the technicals and the fundamentals are in such dire condition, the only saving grace for stock market investors is a sentiment backdrop that would be characterized as one of “despair”—a backdrop that is indicative of no hope—for now and for the future.

With a “no hope” sentiment backdrop, a big enough constituency has bailed out of the stock market to lift a very large share of the selling pressure, and any incremental buying could create a major surge and mark the end of the bear market.

I have no problem with hope and optimism [about] this great nation of ours. But hope and optimism amidst weak fundamentals and weak technicals does present a problem for the stock market. It is indicative of potentially major selling pressure from those who have chosen to remain heavily invested due to this hope and optimism, and who could degenerate into a panicky mob of sellers should there be more economic shocks ahead.

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