In our Macro-Overview this week, I noted the single most dangerous risk factor to stocks is “the unusually high level of bulls.”
Alan Abelson speaks to Crosscurrent’s Alan Newman about the excessive bullish sentiment:
“When bullishness is rampant, the inference to be drawn is that buyers may have already shot their wad, and, of course, the opposite is true — that is, selling has been largely spent when bearishness is in full roar.
Alan Newman, a crack technician, and chief cook and bottle washer at newsletter CrossCurrents, offers another intriguing contrary-sentiment indicator in his latest commentary. It’s based on investor preferences in mutual funds, and he credits some Rydex charts on the Decisionpoint Website with supplying the necessary info.
Recently, Alan relates, money-market and bear-fund assets both fell to multiyear lows, while bull- and sector-fund assets mounted to their highest levels since the October 2007 market peak. Currently, he reports, there is roughly $7.50 in bull and sector funds for every $1 in bear-market fund assets, which he calls “the most ridiculously one-sided sentiment we have seen since the tech mania convinced folks that no price was too high to pay.”
And Alan, who’s usually a pretty cool cat, warns that it has all the makings of a significant downside reversal, beginning “like right now.”
This is worth paying attention to. The sentiment extreme is the biggest threat to ongoing market gains. Of all of the data that people are using to call an end to the rally, extreme sentiment is the one I pay the closest attention to.
Mike Santoli points out the “question of whether the past week’s cocktail of Goldman Sachs vilification, abiding Greek-debt drama and the stock market’s 2% loss will suffice to put a scare into what was a worrisomely unworried crowd.”
It is starting to become worrisome . . .
Leap Before You Look
Barron’s May 1, 2010