Bullish sentiment among short-term market timers is currently at near-record levels, indicating a positive outlook for the market. However, it is essential to rely on objective indicators to understand the historical context and avoid being swayed by mood swings. Contrarian analysis suggests that despite the prevailing optimism, a decline in the market is more likely in the near term.
Understanding the Historical Context
To put the current bullishness into perspective, it is crucial to compare it with past sentiments. Many people assume that bullish sentiment has only moderately increased over the past six to nine months. However, the reality is that it has swung from near-record bearishness in October to near-record bullishness now.
Examining Market Exposure Levels
The average recommended stock market exposure level among short-term stock market timing newsletters can provide insights into sentiment. The Hulbert Stock Newsletter Sentiment Index (HSNSI) measures this exposure level. In October last year, during the market's low point, the HSNSI stood at the 0.08th percentile of all daily readings since 2000. Today, it stands at the 99.99th percentile, indicating an extremely bullish sentiment.
The S&P 500 has experienced a remarkable recovery since its low point in October. It is now more than 25% higher on a total return basis. This significant rebound has caught the attention of contrarian analysts.
Analyzing Russell 1000 Index
The Russell 1000 index is like a special group that keeps track of how big American companies are doing. Since October, it has gone up a lot, more than 20%! This means that the companies in the index are worth a lot more now. One way to measure how valuable they are is by looking at their price compared to how much money they make. This measure is called the forward price/earnings ratio. It used to be around 15 times the money they make, but now it's around 19 times. That's a higher number, especially when interest rates are also high.
Right now, people think these companies will make a lot of money in the future. So, the prices of their stocks already show that they expect the companies to do well for at least a year or more. When a company does better than what people expect, it's called an earnings beat. But if a company only does a little better, it doesn't make a big impact on the overall market. It needs to do a lot better, like a "really big" earnings beat, to make a big difference and make everyone more excited about the market.
Comparisons with the Internet Bubble
Some people are comparing the way people feel about stocks related to artificial intelligence (AI) now to how they felt during the internet boom in 2000. Back then, people were really optimistic about internet stocks, and now they are feeling the same way about AI stocks. But when we look at a special chart called the HSNSI, we see that the level of optimism today is just as high as it was during the internet boom. However, there is a small glimmer of hope. During the internet boom, people stayed really optimistic for a longer time, but now it seems like the strong optimism might not last as long. This means that the current optimistic feelings might not be as strong as they were back then.
The Bulls' Best Hope
Contrarian analysis suggests that for a healthier market advance in the future, a decline is needed in the coming days. This would allow investors to rebuild a "wall of worry," creating a foundation for a more significant market upswing. On the other hand, if the market struggles higher, pushing bullish sentiment into uncharted waters, it would be a worrisome sign.
Opportunities Amidst High Valuations
Even though the prices of many stocks are high right now, there are still some stocks that can make people money even if they don't have really amazing earnings. Some experts have found certain stocks that have been doing well consistently. These stocks have been making more money than expected and people have been buying them, which has made their prices go up. Some of these stocks are Kraft-Heinz, Southern Company, Procter & Gamble, Hershey, Citigroup, eBay, and Lululemon Athletica. So, even in a high-priced market, there are still opportunities to find stocks that could be a good investment.
A Closer Look at Selected Stocks
Among the selected stocks, Citigroup has seen its EPS expectations decline due to concerns over loan volumes and a drop in M&A deals. However, with low expectations and the potential for business stabilization, beating estimates could lead to a stock price increase. eBay, trading at a discount compared to the broader market, may experience gains if its earnings indicate increased consumer spending. Lululemon Athletica, known for its growth potential, could also see its stock rise with solid earnings.
The Importance of Earnings Season
As earnings season begins, it is worth noting that stock prices already reflect solid profit growth for the next year. Modest earnings beats are unlikely to have a significant impact on the broader market. Only substantial beats have the potential to drive market gains.
Bottom Line
While bullish sentiment is at near-record levels, it is essential to consider historical context and objective indicators when assessing market outlook. Contrarian analysis suggests that a decline is more likely in the near term. However, opportunities still exist within the market, especially for stocks that meet specific criteria. As earnings season unfolds, investors should closely monitor earnings beats and market reactions to gauge potential gains.
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