Two Charts Stock Market Investors Should Worry About
There are two important stock market-related charts investors should be worried about. They will be of the utmost interest to bearish investors.
Bearish Investor Sentiment Plummets
The first chart has to do with the declining number of stock market bears. The best time to buy stocks is when there’s blood on the streets (like in 2008). In other words, the best time to buy a stock, or any other investment for that matter, is when it’s down and out and nobody wants to buy it.
Right now, the opposite is true. It looks like the streets are covered with roses. Stocks seem to be the choice of investors, and bearish investors are nowhere to be found. Please look at the chart below of the American Association of Individual Investors’ bearish sentiment index.
Chart courtesy of www.StockCharts.com
The number of investors bearish towards the stock market continues to decline. We saw some wild swings in the number of bearish investors back in 2010, 2011, and 2012; but since 2013, they have been persistently declining.
Smart Money Bullish Towards Stocks?
It’s not only individual investors who have thrown in the towel and turned bullish. We see institutional investors (often referred to as the “smart money”) doing the same thing. Please look at the chart below of the National Association of Active Investment Managers’ Exposure Index. It simply tells how much exposure active money managers have to the U.S. stock markets.
Chart courtesy of www.StockCharts.com
As it stands, active money managers have 92.15% of their portfolio invested in the U.S. stock markets. Over the past several months, their exposure has remained at this level—this suggests they are anything but bearish towards the stock market.
What’s Next for the Stock Market?
As the old adage goes, all that glitters is not gold. And the glitter may be coming off the stock market. Since the beginning of the year, the stock market, as measured by the Dow Jones Industrial Average, has seen some wild daily swings. One day it’s up big-time; the next day it’s down big-time. This tells me it’s a trader’s market and not an investor’s market. Huge stock market gyrations, like the ones we have been experiencing, are often characteristic of market tops.
Tracking back a little, look at the chart of the Dow Jones Industrial Average below and pay special attention to the circled area.
Chart courtesy of www.StockCharts.com
Back in 2007, the Dow Jones Industrial Average traded between 13,000 and 14,000 for roughly seven months before forming a definitive top. Currently, the Dow Jones has been trading in the 17,000–18,000 range since October 2014. More and more, it looks like a stock market top is being put in between 17,000 and 18,000 on the Dow Jones at a time when bearish investors are few and far between.
I reiterate my take on the stock market: I see 2015 as a down year for equities. Looking at the extreme bullish sentiment, I have good reason to stay bearish.
