When it comes to investing my guiding mantra comes from a famous quote by John B Templeton: "bull markets are born in pessimism, grow in skeptisism, mature in optimism and die in euphoria". I constantly scow the press of popular opinion looking for articles that give me an appreciation of the mood of the market. One of my most "highly prized" information sources is surveys of public opinion.
I could not help but notice this article that appeared in Reuters a few days ago:
(Reuters) - Global consumer confidence fell in the second quarter to its lowest level in a year and a half as an uncertain economic outlook, a deepening euro zone debt crisis and rising inflation made people more cautious, the Nielson survey showed on Sunday.
In addition to the Nielson survey, on Friday last week the Michigan University US Consumer Confidence Survey Confidence came in well below expectations (click here for the report).
The top of a bull market is characterized by everyone being a state of "happiness", the future looks bright, the skies are clear, and there is little uncertainty. And when people are optimistic about the future they reflect this in their investing, i.e. at the top of a market everyone tends to be fully invested in the equity market. Now when everyone is fully invested, where is the marginal buyer going to come from to push prices higher? It is from great heights in consumer optimism that you have to worry about significant downside in equity markets. Equally the opposite applies, if is from great depths of despair or pessimism that significant upside in equity markets occur or bull markets take hold! I believe we are at this point now.
Think about it, if the crowd is very bearish on the future, can only see crisis after crisis, then it is highly unlikely that crowd members will be anywhere near fully invested in equities, more than likely they will be crowding into "safe haven" securities like treasuries pushing yields to low levels. We have this condition now. The spread between the yields on US treasuries and earnings yield of the S&P 500 has only been wider on four occasions in the last 40 years. Each of these occasions marked the end of a cyclical bear market. When the average retail investor is not participating or at least has a very low exposure to the equity market, where is the marginal seller going to come from to push equity markets lower?
We have a very strange situation in equity markets right now, especially in the US. Corporate earnings are at record levels and earnings guidance continues to be raised. Yet sentiment remains very bearish as reflected by companies continuing to beat earnings estimates and the historically low valuation levels of the S&P 500. I don't think that there will be any significant downside in equities over the coming weeks. Rather the next big move will be to the upside.
Patient bulls will be well rewarded over the coming weeks.
I could not help but notice this article that appeared in Reuters a few days ago:
(Reuters) - Global consumer confidence fell in the second quarter to its lowest level in a year and a half as an uncertain economic outlook, a deepening euro zone debt crisis and rising inflation made people more cautious, the Nielson survey showed on Sunday.
In addition to the Nielson survey, on Friday last week the Michigan University US Consumer Confidence Survey Confidence came in well below expectations (click here for the report).
The top of a bull market is characterized by everyone being a state of "happiness", the future looks bright, the skies are clear, and there is little uncertainty. And when people are optimistic about the future they reflect this in their investing, i.e. at the top of a market everyone tends to be fully invested in the equity market. Now when everyone is fully invested, where is the marginal buyer going to come from to push prices higher? It is from great heights in consumer optimism that you have to worry about significant downside in equity markets. Equally the opposite applies, if is from great depths of despair or pessimism that significant upside in equity markets occur or bull markets take hold! I believe we are at this point now.
Think about it, if the crowd is very bearish on the future, can only see crisis after crisis, then it is highly unlikely that crowd members will be anywhere near fully invested in equities, more than likely they will be crowding into "safe haven" securities like treasuries pushing yields to low levels. We have this condition now. The spread between the yields on US treasuries and earnings yield of the S&P 500 has only been wider on four occasions in the last 40 years. Each of these occasions marked the end of a cyclical bear market. When the average retail investor is not participating or at least has a very low exposure to the equity market, where is the marginal seller going to come from to push equity markets lower?
We have a very strange situation in equity markets right now, especially in the US. Corporate earnings are at record levels and earnings guidance continues to be raised. Yet sentiment remains very bearish as reflected by companies continuing to beat earnings estimates and the historically low valuation levels of the S&P 500. I don't think that there will be any significant downside in equities over the coming weeks. Rather the next big move will be to the upside.
Patient bulls will be well rewarded over the coming weeks.