Stock Market Bounce Imminent
as Bullish Sentiment Collapses

Michael explains why he thinks a stock market rally is imminent.As funny as it sounds, in the business of forecasting the direction of stock prices, it has been proven that the market moves in the opposite direction of what stock advisors expect of it.

A classic example of this: in October 2007, when stocks were at an all-time record high, the percentage of stock advisors bullish vs. those bearish was at a record high. Of course, the stock market fell 55% from October 2007 to March 2009.

In March 2009, when stocks were at multi-year lows, the percentage of stock advisors bearish vs. those bullish was near a record high. Of course, the stock market took off on March 9, 2009, and has never looked back.

When stock advisors are either at extreme bullish or bearish sentiment positions, the stock market moves in the opposite direction of what the stock advisors are predicting. Almost never fails.

Advertisement

This brings me to today…

I follow various analytical services that gauge the sentiment of stock advisors. With the recent pull-back in stock prices, the number of stock advisors turning bearish has swelled.

In fact, the percentage of bullish stock advisors in the marketplace has fallen to a low not seen since September 2010 (Source: Investors Intelligence). The Dow Jones Industrial Average rose 22.6% from the beginning of September 2010 to May 2, 2011.

Yes, corporate earnings, monetary policy and the economic picture drive the long-term direction of the stock market. And, while I’m bearish on long-term prospects for America, we must acknowledge that corporate earnings are still strong and monetary policy is favorable. Only the weak economic situation is slowly being discounted by the market.

After a sharp decline of 926 points by the Dow Jones Industrial Average from May 2, 2011, to June 13, 2011, and given the sharp rise in stock advisor bearishness, I believe that the odds strongly favor a stock market rally here from severely oversold market conditions. We got a taste of that rally yesterday for the first time in weeks, as the Dow Jones snapped 123 points to the upside.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. “A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way out of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on over-extended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.