Let's see what sentiment is in US right now.
As of October 10, eight of the last 12 trading days had intraday moves of greater than 200 points in the Dow. Volatile days like these are a reminder for many that they need to wake up and take notice, because most people get taken by surprise.
Bullish stock market pundits recently held that, "a large exposure to equities remains essentially the only option for people with a 10-year or longer horizon." They still believe the market will continue to rise indefinitely because the average investor is currently disinterested in stocks and their return will fuel further advance. But the chart clearly shows an exceptional depth of public involvement.
In fact, the bottom graph of U.S. households stock ownership, which is drawn from the Federal Reserve's latest balance sheet figures of assets and liabilities, just hit a rare extreme. According to the second-quarter figures, the public's holdings of stocks and mutual fund shares (plus life insurance company holdings of stocks and mutual fund shares) equaled 34.4% of total household financial assets. That's the highest total since the end of bull market in 2000, when a record 39.4% of household financial assets were in stocks.
Notice that while household stock holdings continued to rise through the start of Cycle wave IV in 1966, they eventually reversed and continued to fall even after the Dow Industrials bottomed in 1974. In fact, household share ownership slipped to a low of 10.6% in the second quarter of 1982, when the inflation-adjusted Dow also bottomed.
This is the basic pattern: The public will hold at the front end of a bear market only to get washed out by the end. Over the course of the now-unfolding bear, a similar household contempt for stocks should carry this measure to an even lower level than in 1982.
As stocks finished their recent rally, the consensus of the experts hardened into a near monolithic belief in the inevitability of higher prices. A September 8 survey of 490 investment professionals by Carter Worth of Oppenheimer & Co. showed "a clear [bullish] consensus as to how the remainder of the year plays out." With the S&P trading just over 2000, 95% of respondents said the S&P 500 will finish the year in the black, while 89% called for further gains from then-current levels. Just 5% of respondents expected the S&P to close in the red, which would entail a fall of 7.6% from its September 8 close at 2001.54.
The biggest firms were among the most bullish. On September 8, a Bloomberg headline announced that one "Sees Decade-Long Global Expansion." A week later, the chief stock strategist at another said he was so keen on the prospect for equities that he was leaving to start his own company. "This is going to be one of the longest bull markets in history, and I wanted to take advantage of that," reported The Wall Street Journal.
From December 31 to the closing high on September 19, the Dow Industrials gained a little over 4%. By Mania Era standards, that's a relatively mild performance. But the relentless string of record highs continually revved investors' engines. By September 12, the media was egging things along. Noting that the S&P 500 was at 2000 and "setting another record every day," the headline of a major web column stated confidently, "NASDAQ Is Poised to Top 5,000." At 4568, the NASDAQ was still 9% away from this round-number milestone and 10% from its all-time high. I don't think it will make it. But confidence has been so high that to most observers it seems inevitable. This early September graphic from the Drudge Report captures the basic sentiment:
Narrow though they were, many of even the most resolute bears succumbed to the euphoria generated by the second-to-last round of new highs. In the first week of September, the percentage of bears as reported by Investors Intelligence slipped to just 13.3% That's the lowest total since February 1987, which was in the latter part of Primary wave 3, the strongest wave within Cycle wave V. The recent low reading accompanied a slew of bullish conversions that were so pronounced that The Wall Street Journal produced this "Missing" poster underneath the headline "Bears Turn Docile."
The long period of optimizm has made forecasters aggressively positive on stocks and the economy. An economist and an investment strategist at Morgan Stanley have just predicted S&P500 will rise 50% to 3000 by 2020, 5 years from now. I agree entirely on the 3000 number, just disagree on the index. Citibank's technical team is predicting an even faster gain, projecting the s&p500 as high as 2400 by January 2015, just three months from now. It even recommends that no one worry about seasonal weak September-October period this year.
At the same time, the chief international economist at Morgan Stanley predicts that the "recovery from the great recession could easily extend another five years", with growth of 3,5% in 2015 and 3,8% in 2016. He's not alone. The consensus among economists is that US will enjoy years of growth at a 3% clip.
All these predictions have their bases, but I think one of them is unconscious: the shared optimism of the crowd. Major institutions can afford the smartest economists on the planet, but at this point is better to bet against them anyway. Recall that the consensus has also been calling for accelerating growth in Japan and Europe. But Japan has reported a stunning 7,1% annualized rate of economic
contraction for April, May and June. That's depression rate. Meanwhile, Europe is on precipice of deflation, and US maybe as well.
Will Australian markets hold? I don't think so. In 2008-2009, there were no markets on the planet climbing against US, even currencies, commodities markets were falling. Today's extreme historical optimism is sending a message to EW minded investors/traders to be prepared for a major turn.