In this sneak peek from the Action Alerts PLUS investing club, technical analyst Helene Meisler explains why a little bearishness could be a good thing as Wall Street increasingly becomes optimistic heading into the final trading days of 2023.
Related: Analyst who correctly predicted 8% mortgage rates has a new target
FULL TRANSCRIPT BELOW:
J.D. DURKIN: Wall Street has become increasingly bullish. The media loves to wrap market sentiment, Helene, with neat bull versus bear back and forth. But in practice, it should be treated a lot more seriously than just some flashy, quick, shiny thing headline. Helene, why do you keep track of sentiment? And how does that influence your own personal approach to the market?
HELENE MEISLER: OK. First of all, we keep track of it because we want to know when, if you will, think of a boat. When a boat is loaded too far on one side, it has a tendency to flip back, either flip over or flip back to the other side. And so we don’t want sentiment to get too– well, when we were in late October, we got sentiment too bearish. And then you see that people have to scramble and shorts have to cover and nobody wants to own stocks. And then all of a sudden, everybody wants to own stocks because the stocks are going up.
And so sentiment slowly starts to move towards bullishness. And now we’re getting to the point where bullishness– I don’t think we’re quite giddy. But we’re on the verge of getting, if you will, the boat tipping a little too far to one side. And the reason we care about it is the same reason we cared when people got too bearish is that when they get too bullish, if everybody owns stocks, who’s going to be left to buy? So you need to shake it out and get people a little bearish so they think, oh, God, maybe I don’t need to own stocks here. And then you can go up again. So it’s the same concept as an overbought market that got a little ahead of itself.
J.D. DURKIN: I love that. Now, Helene, you’ve seen numerous signs of more investors warming up to the market. Can you walk us through some of the indicators that you’ve been closely watching as well as their significance?
HELENE MEISLER: Yeah. First of all, the Investors Intelligence bulls have gotten to 55% this week. To give you an idea, generally speaking, 55% to 60%, you’re sort on the verge of giddiness. You’ve really converted a lot of people to bullishness. We got to 56% the first week in August. And then you saw we had a big correction. So that’ll give you an idea.
When we look at the American Association of Individual Investors, which is, to me, I think it’s a little bit more like day traders, but they’re now at 48% bulls. They got to 51% in August. So you can see– and they were down– I can’t quite remember, but I think they were down at like 30%, or maybe it was 25%, in late August. So they’re getting a little frothy.
And then if we think about the bears, the bears in the AAII poll are now at 19.6. And that is the first time that they’ve been teenagers since 2021. That’s a long time. And so maybe they’re not as bullish as they were in August, but they’re certainly a lot less bearish. And if you take a look at this chart here, I’d like to plot it on a four-week moving average because it gives you a little bit more of a trend.
And the first thing is you can see that big peak in the four-week moving average– that’s the blue line– right at the low. People were way too bearish. And now you can see we’re fast approaching the kind of readings that we had, again, in early August.
But even if you go back and you take a look at those twin lows in 2021– and I know people are going to say, yeah, but, look, the market kept going up, except if you take a walk down memory lane to 2021, you might recall the second half of the year was all what we called FAANG stocks. Now we call them the Magnificent Seven. But it was a terrible year for any other stock in the second half. And then in November even the FAANG stocks peaked out. So you care about sentiment because, again, you don’t want the boat to capsize. You want it to right itself again.
J.D. DURKIN: Helene, if I could ask you a quick follow up on this, to this point of AAII, you wrote this week that folks have finally gotten in the pool. Why do you think they are in the pool? And how long do you suspect they will stay there for?
HELENE MEISLER: OK. So I always refer to sentiment as either everybody’s in the pool or everybody’s out of the pool. And so if you think about a pool that goes from shallow to deep, the way I see it is people sort of, as the market rallies, they take a step, they stand on the first step, they get adjusted to the water, then they take another step in, and so forth and so on.
And now the way I see it is they’re sort of in the shallow end. They haven’t really taken a big deep dive into the deep end. And that’s the next step. Now, if you get a pullback, what you do is you get everybody scurrying back to the steps, which is, to me, bullish. You don’t want everybody diving straight into the deep end.
J.D. DURKIN: Helene, I got to say, between boats and pools, you do a wonderful job of just describing the imagery. I mean this sincerely because I think for people that kind of approach these topics and they think, oh, it’s a bit ambiguous, a little esoteric, it really does paint a really wonderful picture in terms of what you’re trying to describe.
