Friday, April 18, 2008

50-Week Moving Average of AAII % Bears Hits New Record High

* Notwithstanding historical individual and professional investor pessimism, corporate insiders continue to buy their own stocks.

The AAII percentage of bulls fell to 30.4% this week from 45.8% the prior week. This reading is still at a depressed level. The AAII percentage of bears rose to 48.7% this week from 37.3% the prior week. This reading is still at an elevated level. Moreover, the 10-week moving average of the percentage of bears is currently at 45.6%, an extraordinarily elevated level, but down from its peak of 51.3% in mid-March. It has only been higher than its current reading two other periods in history, which were September 1990-December 1990 and July 2006-August 2006. 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 still 2.6 percentage points greater now than at any time during the bubble bursting meltdown of 2000-2003 when the Nasdaq plummeted 77.2%. That was arguably the worst broad stock market decline since the Great Depression, yet individual investor bearishness is higher right now, notwithstanding the recent rally off the lows.

Furthermore, the 50-week moving average of the percentage of bears is currently 42.9%, an extraordinarily elevated level never before seen since tracking began in the 80s. The prior peak in the 50-week moving average of the % Bears was 41.7%, hit in January 1991 after Iraq’s invasion of Kuwait, during the Gulf War and in the middle of a bad recession. Since January 1991, when the future looked so bleak to investors and consumers, the S&P 500 has risen about 450%. Moreover, the current reading of 42.9% is 4.8 percentage points above the peak in the % Bears during the 2000-2003 bear market, which was 38.1% on April 10, 2003. I find this even more astonishing, notwithstanding the recent correction, given that the S&P 500 is currently 76.6% higher from the October 2002 major bear market lows and only 10.2% off its all-time high.

Individual and professional investor pessimism towards US stocks remains deep-seated and historical in nature. It is also noteworthy that short interest continues to soar to new record highs, corporate insiders continue to display downright giddy behavior, domestic mutual funds continue to see significant outflows, hedge funds remain net short, the equity put/call 20-day moving average recently hit an extreme, a massive mountain of money market cash on the sidelines continues to grow and according to Google Trends the use of the word “depression” in the news media has recently spiked over the last year. This is just some of the evidence of the current “US negativity bubble.”

I still expect US stocks to rise sharply from current levels later this year as economic growth improves, investors’/consumers’ historically extreme pessimism recedes, credit market angst subsides, energy prices drop, interest rates remain relatively low, inflation decelerates, election uncertainty lifts, the US dollar rallies, international/domestic demand for US stocks rises and meaningful short-covering commences. I continue to believe US investor/consumer sentiment has never before in history been this bad given the current macro backdrop, which is a necessary ingredient for the creation of a new strong secular bull move higher in US stocks.

No comments: