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Schwab’s trading specialists

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Randy Frederick
Managing Director of Trading and Derivatives at Schwab
Weekly Market Perspectives

How Much Longer Could the Bull Market Last?

January 10, 2018


RANDY FREDERICK: The bull market is beginning to feel unstoppable, with gains of more than 290% in the S&P 500 since it began, and more than 20% in just the past year. Liz Ann Sonders joins me for the January 9th Schwab Market Snapshot to talk about some of the data that she watches to help gauge when this momentum might begin to slow down a little bit.

So Liz Ann, I know that you’re a life-long observer of investor sentiment data. Now, we’ve recently surpassed some pretty significant milestones—2,700 on the S&P, 7,000 on the NASDAQ, and 25,000 on the Dow Industrials. Can you tell us what some of the investor sentiment data that you watch is telling you right now?

LIZ ANN SONDERS: Sure. Thanks, Randy. Let me just start with the anecdotal. I do think that as you hit milestones it sometimes adds to investor enthusiasm. And I’ve definitely noticed in client events when I travel around the country that during the Q&A sessions there’s quite a bit more optimism than there’s really been since this bull market began in the beginning of 2009. But there are some actual ways to measure this.

Two very popular ones are AAII and Investors’ Intelligence. AAII is American Association of Individual Investors. They do a weekly survey of their members, and right now the bull ratio, so the ratio of bulls to bears is just under 80%. We’ve only been there one other time this entire bull market, so that’s a notable pickup in optimism. Investors’ Intelligence measures the optimism or pessimism of investment newsletter writers. That’s now at the highest level it’s been in this entire bull market.

And then if you look at Ned Davis Research Crowd Sentiment Poll, which is one that I watch quite regularly because it’s an amalgamation of seven individual sentiment indicators—including the two that I just mentioned—that also is at the highest level of optimism that we’ve seen in this entire bull market. So I do think, given that at extreme sentiment tends to act as a contrarian indicator, it’s just something we need to me mindful of, as we think about the possibility of maybe some more volatility this year.

RANDY: Well, now, if I’m not mistaken, what you just talked about are primarily what we call attitudinal measures of investor sentiment. What about some of the more behavioral measures? And what I mean by that is what are investors actually doing with their money?

LIZ ANN: Yeah, so there’s one common way to measure the behavior of investors, and that’s fund flows. And if you just look at the U.S. equity market, traditional mutual funds have seen pretty consistent outflows, really, this entire bull market. But that’s not the whole story because exchange-traded funds have been quite a bit more popular. They’ve seen mostly inflows. But even if you add the two together, on a net cumulative basis, no new money has been added to the U.S. equity market. Now, equity exposure by individuals is actually quite high, and that’s because investors have been highly interested in non-U.S. investment. So cash levels are relatively low.

But then there’s a—there’s one that maybe isn’t as well-known that I follow, which is a pair of indexes put out by Sentiment Trader. And they call it, this is their terminology, Smart Money Confidence Index and Dumb Money Confidence Index. And they’re tracking what these actual cohorts are doing with their money. So their so-called Smart Money indicator represents the big institutions, commercial hedgers, position traders. And the so-called Dumb Money would be the smaller odd-lot, typically, individual investors.

Now, the former tends to be the non-contrarian indicator, the latter tends to be the contrarian indicator. And for what it’s worth right now, the spread is fairly high, with a lot of so-called Dumb Money optimism, much less Smart Money optimism. Now, it’s not a spread as wide as it’s been in the past, signaling any kind of immediate concern for the market, but it’s something we need to be mindful of.  Now, I actually think some pullbacks this year would be healthy, because it might serve to keep this sentiment from getting overly euphoric, which, again, tends to be a contrarian indicator.

RANDY: Yeah. No, I tend to agree, and I think you’ve given investors a few things to think about over the coming months.

Listen, you can read more from Liz Ann in the Insights & Ideas section on Schwab.com. You can follow Liz Ann on Twitter @LizAnnSonders, and, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.


Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Investing involves risk including loss of principal.


Definitions


The Dow Jones Industrial Average (DJIA) includes the stocks of 30 of the largest and most influential companies in United States.

The S&P 500® Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares.

The NASDAQ Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks.

©2018 Charles Schwab & Co., Inc. (“Schwab”). All rights reserved. Member SIPC (0118-8RAE).

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DISCLOSURE
This material was prepared by an independent third party that is not affiliated with Schwab. Schwab does not edit or endorse any of this material and is not responsible for its content.

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