Investor Sentiment: What’s Behind its Latest Twist

Investor sentiment Investor sentiment is changing on a dime in this stock market and I wouldn’t be surprised at all if we experienced a bit of a pullback now. The broader market’s been doing very well since the beginning of the year, especially the NASDAQ.

This business regarding the sovereign debt problem in Greece is one gigantic pain for equity investors. It’s like a lingering threat to your pocketbook that just won’t go away. (See The Debt Crisis & the Great Euro Reckoning—What the Fallout Means to Americans.) We’re at the stage now where, in spite of the short-term hit to the stock market, we’d be better off with the certainty of a default. This persistent uncertainty is the greatest risk of all and it will continue to weigh on investor sentiment. If this issue were settled, I’d bet the S&P 500 Index would be well over 1,400.

We’re in the lull between earnings seasons and investor sentiment typically wanes a bit in the absence of corporate reporting. While I am expecting a positive year for stocks in 2012 (barring a new war with Iran or some other unexpected shock), investment risk in the stock market remains high and investors have no need to rush into any new positions. This is still a stock-picker’s market with little tailwind from the broader market.

Investor sentiment is also being pressured once again by lingering uncertainty regarding the health of U.S. banks, which continue to have big mortgage liabilities. The amount of foreclosures on U.S. homes rose again in January and, practically speaking, you can’t have a growing Main Street economy without price stability in the housing market. There is still a long way to go before the U.S. real estate market can begin a new, upward business cycle and this directly affects the health of the U.S. financial sector.

As I say, I’d be in no rush to consider new positions in the stock market at this particular point in time. Valuations are still reasonable and this is very helpful, but investor sentiment can’t get bullish until the sovereign debt crisis in Europe is properly dealt with, regardless of the consequences. As an investment strategy, I would be identifying solid, dividend paying assets on the stock market and would just wait until a price correction before buying.

I do think the stock market (S&P 500 Index) will be able to complete its right shoulder technical formation sometime this year. Price-wise, however, I feel that this would represent a topping out of the stock market, in anticipation of slower earnings growth and a possible recession in 2013. This is why I’m not particularly bullish on the stock market and why investor sentiment among institutional investors is so unstable. Share prices can move higher this year, but it’s going to be a choppy affair just like last year.