Chart: Too Much Optimism Points to U.S. Stock Losses

Investors are showing enough optimism about U.S. stocks that “the risk of a short-term pullback” is rising, according to Myles Zyblock, chief institutional strategist at RBC Capital Markets.

The CHART OF THE DAY displays two indicators that Zyblock used to support his conclusion in a report yesterday. They come from weekly surveys by the American Association of Individual Investors and the National Association of Active Investment Managers. Both appear in the top panel, and the Standard & Poor’s 500 Index is in the bottom panel for reference.

“Shifts in sentiment are critical” in judging potential stock returns, wrote Zyblock, based in Toronto. He estimated that the swings account for two-thirds of gains or losses for six-month periods, and added that the current survey readings suggest prices are due to fall.

Bulls accounted for 51.6 percent of respondents in last week’s AAII survey. The figure was the highest in 13 months. Just 20.2 percent were bearish.

The manager index rose last week to 72.66, a nine-month high. Survey responses can range between 200, signaling that a participant is borrowing to profit from stock gains, and minus 200, showing the use of leverage to bet against shares.

Any sentiment-related decline in stocks will only interrupt a rally that began in last year’s second half, Zyblock wrote. He cited surveys by the Conference Board, the Institute for Supply Management and the National Federation of Independent Business that point to a pessimistic, though improving, outlook for the U.S. economy.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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