Huge Bearish Sentiment to
Propel Stock Market Rally

Stock advisors have left the bullish camp in droves and have jumped onto the bearish bandwagon. Wherever we look, there is blatant negativity. The bears are aggressively outnumbering the bulls...why Michael thinks this is a good sign for the stock market.Loyal and long-term readers know I’m a contrarian investor at heart. When investors are selling in droves, I want to buy. Similarly, when investors are buying stocks as a herd, I’m selling.

And this brings me to today’s very important issue.

I follow several services that gauge the sentiment of consumers, investors, and stock advisors. And from 30 years of investing experience, I can tell you that the stock market usually does the opposite of what the consensus believes it will do.

As an example, in March of 2009, at the depth of market pessimism, when investors and stock market advisors were at their most negative consensus in years, the stock market took off. In October of 2007, when investors and advisors were at an extreme bullish level, stocks started to crash.

My news today is that, over the past couple of weeks, the number of stock advisors who have turned bearish on the stock market has reached a level not seen since the fall of 2010 (Source: Investors Intelligence).

Stock advisors have left the bullish camp in droves and have jumped onto the bearish bandwagon. Wherever I look, I see blatant negativity. The bears are aggressively outnumbering the bulls, and when I see this kind of action…the stock market usually rallies. Investors pulled big money out of the stock market in August. A recent CNN-sponsored poll says that almost half of all Americans expect a depression within the next 12 months. Negativity is at extreme levels.

What I’m saying today is that there is sufficient bearishness among investors and stock advisors for the stock market to give us a meaningful rally from here. If I were to short the stock market right now, I’d be covering my shorts.

Michael’s Personal Notes:

“Is silver still a good buy?” This is a question I regularly hear from precious metals investors these days.

The simple answer is that I believe silver prices have gotten a little ahead of themselves. Yes, I like the long-term prospects for most precious metals, but silver prices have already enjoyed a spectacular run-up and are due for a correction.

This morning, it takes 45 ounces of silver to buy one ounce of gold bullion—the high-end of the historic price relationship between the metals. At the end of 2008, it took 80 ounces of silver to buy one ounce of gold—silver prices have come a long way.

If we look over the past 12-month period, gold bullion prices have risen 42%, while silver prices have soared more than double that—silver has risen in price 96% in the past 12-month period.

I believe that, after spectacular run-ups, both gold and silver prices are headed for a correction. I won’t sell my gold—as prices move lower, I will use that opportunity to buy more gold investments. But to make silver a screaming buy for me once again, either the price of the metal has to decline or the price of gold has to rise to close the gold/silver price ratio gap.

Where the Market Stands: Where it’s Headed:

Stocks are closing the gap on their loss for 2011. After yesterday’s 140-point rally by the Dow Jones Industrial Average, stocks are down 2.7% for 2011.

The stock market continues to climb the proverbial “wall of worry.” I believe that the market will move higher from here, as the bear market rally that started back in March of 2009 continues its advance.

What He Said:

“What group of stocks are next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.