Friday, December 21, 2007

Bearish Sentiment Now Exceeds Levels Seen at Depths of 2000-2003 Bear Market

* Meanwhile, corporate insiders are buying hand over fist.

The AAII percentage of bulls dropped to 35.85% this week from 47.6% the prior week. This reading is approaching depressed levels. The AAII percentage of bears jumped to 47.2% this week from 35.7% the prior week. This reading is now approaching elevated levels. Moreover, the 10-week moving average of the percentage of bears is currently at 45.3%, an elevated level. It has only been higher two other times in its history, which were July-August 2006 and September 1990-December 1990. Moreover, the 10-week moving average of the percentage of bears peaked at 43.0% right near the major bear market low during 2002. It is astonishing that the 10-week moving average of the % bears is currently greater than at any time during the bubble bursting meltdown of 2000-2003, which was arguably the worst stock market decline since the Great Depression.

Furthermore, the 50-week moving average of the percentage of bears is currently 38.3%, an elevated level seen during only one other period since tracking began in the 80s. That period was October 1990-July 1991, right near another major stock market bottom. The extreme reading of the 50-week moving average of the percentage of bears during that period peaked at 41.6% on Jan. 31, 1991. The current reading of 38.3% is slightly above the peak during the 2000-2003 bear market, which was 38.1% on April 10, 2003. I find this even more astonishing, notwithstanding the recent pullback, given that the S&P 500 is currently 102% higher from the October 2002 major bear market lows and just 5.2% off a record high.

Individual investor pessimism towards US stocks is currently deep-seated and historical in nature. This is just more evidence of the current “US negativity bubble" and bodes very well for further out-sized gains over the intermediate-term. It is also noteworthy that as investor pessimism grows ever thicker, corporate insiders continue to display downright giddy behavior with their recent stock activity during this pullback. It is even more interesting that the retail sector is seeing substantial insider buying, notwithstanding the current extreme investor pessimism towards the prospects for consumer spending. Prior to the 2000 economic downturn, insiders were bailing in droves. I continue to believe US stocks are poised for very strong performance during the first quarter of next year as the undying belief in an imminent recession fades and the uncertainty currently surrounding the financial sector lifts substantially.

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