|Contrary indicators are usually interpreted simplistically: When there are too many bulls, the market will turn down. Excessive bearishness will inevitably lead to a decline. The problem with this approach is that the crowd will only be wrong at turning points. It takes buyers to move a market higher, and increasing bullishness is a vital component of any bull market. So a simple analysis of sentiment surveys will work sometimes, and will not work at others.|
|Sentiment also needs to be looked at on a relative basis. Most sentiment indexes, with the exception of AAII's data, are available only on a subscription basis. In Figure 1, we show the Genesis Sentiment Index, which places the data in relation to the most recent 26 weeks.|
|FIGURE 1: S&P 500, WEEKLY. Sentiment, although high, is still not at an overbought extreme.|
|Graphic provided by: TradeNavigator.com.|
|This index timed the top in late 2007 but was early twice in 2006 and remained high throughout most of the carnage in 2008.|
|Combining sentiment with buying power offers an additional level of insight into investor attitudes. AAII has shown the number of bulls rising in a choppy manner since the March lows. At the bottom, less than 19% of individuals were bullish and more than 70% bearish. Looking at cash in money market funds shows that as these investors turn bullish, they have a lot of money to back up their opinions.|
|FIGURE 2: MONEY MARKET ASSETS. Total assets in money market funds represent 42% of stock market capitalization.|
|Graphic provided by: Barrons.com.|
|In Figure 2, we see that the amount of cash in money market funds is near a record high when measured as a percentage of stock market capitalization. Investors have more than $3.6 trillion available to but stocks. Bulls with money should lead to higher prices.|
Placed in context, we see that sentiment indexes offer clues as to market direction. It should be considered as only one factor in market analysis. At this time, with such a large amount of cash on the sidelines, sentiment can, in all likelihood, go much higher without indicating that a market decline is imminent.
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