Beware Anecdotal Sentiment Readings!

It’s the time of year when predictions are in order. Not by us, but by other people. We have spilled plenty of pixels on why forecasts are folly (see this, this, this, this and this); we won’t revisit that well-trod ground, at least not today. Instead, I wanted to discuss the rather annoying tendency of commentators to extrapolate market sentiment to well, infinity and beyond.

Two recent news items have reminded me that it’s time to discuss sentiment. The first was this weekend’s Barron’s Strategist Outlook; the second was the CFA Institute’s Global Market Sentiment Survey.

Let’s cut to the chase: Sentiment readings have very little correlation with markets, except when they reach extreme levels. I defy you to find anyone who has consistently made money off of the American Association of Individual Investors weekly sentiment readings; even on a monthly basis, they are so noisy as to be useless to traders.

In our office, we have been debating what it means when Barron’s survey of 10 top Wall Street strategists is devoid of bears. Collectively, they expect the Standard & Poor’s 500 Index to gain 10 percent next year. Their predictions range from 2,100 to 2,350 for the S&P (it’s now about 1,990), while they anticipate gross domestic product growth of 2.75 percent to 3.5 percent.

This could be taken as a contrary signal that we have become too bullish and are due for a major correction or worse. The problem is that strategists are bullish pretty much all the time, with very few bears showing up in most surveys.

Continues here

 

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