The S&P 500 tried to eclipse its all-time high during four straight days last week, but a series of late-day distributions kept the champagne corked and the glasses dry. Keep the bubbly on ice; we think it's only a matter of time. What the heck, we've already waited more than seven years so what's a couple more days?
As we have reiterated over and over recently, indexes as well as individual stocks tend to run into a brick wall the first time they rally back to an important milestone. Investors have a tendency to step back near old highs and the buying dries up and eventually the selling increases. The intraday highs last week were all above the all-time closing high of 1527.46. From Monday to Thursday, the highs were 1529.87, 1529.24, 1532.43, and 1529.31. The highest close for the week occurred on Monday at 1525.10. Close, but no cigar, yet.
Besides the reluctance by investors at milestones, there were also a fair number of technical reasons for the S&P 500 and the overall stock market to pull back from current levels. Bond yields ran up to their highest levels since January. Daily momentum indicators, which had already moved to overbought levels, were starting to trace out some minor divergences. Weekly momentum indicators were just moving into overbought territory. Internal measurements of the market had started to weaken, not keeping up with the move in the indexes.
Some sentiment measures were getting a little frothy, in our view, and the rise in the Chinese stock market was getting downright scary. And, a front page article from a major business newspaper telling us the market has another decade of gains didn't help matters.
However, once the market catches its breath, we see the S&P 500's intermediate-term trend extending, with the index running up towards the 1575 to 1625 area by the summer. We also think that the stock market can extend its gains from a longer-term perspective as the next major cycle low is not due until 2010.
This certainly does not mean that the market's advance can continue unabated for the next three years as we think it's likely that there will be some nasty corrections along the way. It does suggest from a cycle standpoint that the market could climb much higher than many are expecting. Bull markets tend to carry much further than people expect, and long-term trends are very powerful forces.
One of the real dichotomies concerning the stock market and sentiment, and one that keeps us firmly in the bullish camp, is the differing opinion between market professionals and individual investors. For the most part, sentiment, whether it is put/call ratios, sentiment polls, short interest, or volume flows in and out of speculative stocks tends to move as a giant wave. However, there are instances that sentiment indicators diverge, and we have found it is best to go with the professionals and fade the individual investor.
Recent sentiment poll data is showing the widest spread in market opinions between individuals and professionals, and one of the widest spreads between individuals and futures traders going all the way to 1990. We are comparing the American Association of Individual Investors poll with the MarketVane and Consensus polls.
The MarketVane poll measures the futures market sentiment each day by following the trading recommendations of leading Commodity Trading Advisors. The Consensus poll measures the positions and attitudes of major professional brokerage firms and advisors. It draws from an extensive mix of both brokerage house analysts and independent advisory services, from both contributors and non-contributors. The data covers a broad spectrum of approaches to the market, including fundamental, technical, and cyclical.
Some of the latest readings from these polls are pretty astounding, in our view. The Consensus poll is showing that 78% are bullish, one of the highest readings since 1990. The MarketVane poll is also exhibiting high levels of optimism towards the market, with readings of 70% or above over the last eight weeks. So, it's clear to us that the professional is rather positive on the stock market. The individual investor on the other hand is acting like the market has been moving flat to down over the past couple of years as bearish sentiment leads bullish sentiment 39% to 37%. Incredibly, just three weeks ago, bearish sentiment on the AAII poll was 54% while bullish sentiment was only 29%. We think this is all quite unusual with respect to what the market has done of late.
We looked at the difference between the polls going back to 1990, and came up with some interesting observations. Just two weeks ago, the difference between bullish sentiment on the Consensus poll and AAII poll hit 48 percentage points, the widest spread since 1990. At the same time, the spread between MarketVane bulls and AAII bulls was 43 percentage points, the widest since the market low in April, 2005, and the second widest spread since 1990. These positive spreads have tended to be wide during bull markets and tend to dip into negative territory during less favorable market environments.
So, historically, the pros seem to get it right when it comes to forecasting the stock market. It isn't until individuals throw in the towel and get really bullish that we have seen major market tops. At this point, that seems like a long way off.