Overly Optimistic Stock Market Sentiment Flashes Warning Sign!

By The Curmudgeon

The CURMUDGEON has not been bullish on the 2013 stock market, despite the explosive rally the first two weeks of this year.  We believe that all the good news is in the market and that recent bullish optimism indicates a stock market top is near. 

 

As per previous posts, we've been skeptical of the November 2012 to January 2013 rally because:

 

1. We thought the fiscal cliff deal had already been factored into U.S. stock prices.  This despite the fact that none of the real budget deficit and debt ceiling problems have been solved and have been once again "kicked down the road."

2. Earnings momentum has been declining for over 1 year now, while the ratio of U.S corporate earnings to GDP is at an all-time high.

3. There's way too much investor complacency, as indicated by 5 year low on the VIX.  Also, analysts interviewed by Barronís are universally bullish as is the current sentiment readings. 

 

In particular, we cite the following evidence of bullish sentiment and complacency:

http://www.financialsense.com/contributors/carl-swenlin/rydex-ratio-implies-price-top-near

 

Sentiment alone is insufficient to call a market top, but it is definitely a warning sign.   Historical high readings of bullish sentiment almost always indicated a major stock market top was at hand.  Caveat emptor!

 

Until next time...........................................

 

The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.