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Long-Running Bull Finally Attracting Believers?

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RANDY FREDERICK: On August 15, all three of the major market equity indices closed at record highs. Liz Ann Sonders, Schwab’s chief investment strategist, joins me for the August 17 Schwab Market Snapshot to discuss why after seven-and-a-half years and more than 220%, most investors still don’t respect this bull market. Welcome back, Liz Ann.

LIZ ANN SONDERS: Thanks, Randy. And thanks, everybody, for tuning in.

RANDY: So, Liz Ann, we’re in the midst of the second-longest bull market since World War II, and yet you call this the Rodney Dangerfield of markets. Now, why, exactly, is it that institutional and retail investors, alike, just won’t give this market any respect?

LIZ ANN: So I think it’s a number of things, not least being the fact that this was not only a severe bear market that we had ending in 2009, but a financial crisis associated with it. And it came within 10 years of the prior severe bear market that began in 2000.

So you had a lot of investors that had these two epic bear markets of financial crises all wrapped in a fairly condensed period of time, and I think that puts people on guard. It’s very similar, I think, to the attitude that came out of the Great Depression era—with the severity of the weakness in the market there. And a lot of investors just threw in the towel in perpetuity and I think we have a little bit of that this time. So I think that’s the primary rationale why we’ve had this persistent skepticism for this entire bull market so far.

RANDY: Well, let’s unpack this topic of investor sentiment because it’s kind of important. Now there are lots of different sentiment measures—the AAII Survey, the Investors’ Intelligence, Ned Davis Crowd Sentiment Poll®, various different indicators of fund flows, and one of your favorites, the Confidence Indicator. So which of these particular surveys do you find most reliable and why?

LIZ ANN: So, Randy, I do look at all of them, and I’ll tell you in a second which one I probably look at more than others. But let me first make two important points about sentiment.

One, the reason why sentiment is watched quite closely by market watchers like myself and why it often acts in a contrarian way, is—the analogy I often use—is if most investors are wildly optimistic it probably means they’re already invested in the market. So there’s not that additional fuel and vice versa, obviously, in the other direction.

The other thing I would say is there are two broad categories of sentiment indicators. One category measures attitudes of investors—just, basically, surveying investors as to whether they say they’re bullish or bearish. —or behavioral measures. You mentioned fund flows. What are investors actually doing with their money?

Now, one metric that you mentioned, that I really like, is Ned Davis Research’s Crowd Sentiment Poll®. And one of reasons why I like it is it actually takes seven individual sentiment indicators, some of which you mentioned, and packs them all into one. And it’s a nice consolidated way to look at sentiment.

RANDY: Well, now, I watch some of these myself, and correct me if I’m wrong, but I think most of these surveys had been weakening since at least early 2015 until just recently. So what should investors take from this recent uptick in some of these indicators?

LIZ ANN: Yes, so sentiment has been extraordinarily subdued and you saw a real plunge in optimism around the Brexit vote in June, and you saw some measures of sentiment go to extreme levels of bearishness. And, you’re right, we’ve seen that pick up. The good news is, is most of them we’ve seen a pickup, but not back up into extreme optimism territory that would be sending a potential short-term problematic signal for the market. So, yes, improved sentiment—but not at an extreme that you would want to take a contrarian view against.

RANDY: Now, one of the things I like to watch is short-term equity and derivatives activity and I’ve been watching it pretty closely. And the one thing that’s caught my eye recently is a pretty sizeable buildup in way-out-of-the-money VIX call options for the September 21 expiration. Now, of course, that’s day two of the next FOMC meeting and I have a feeling that’s not just a coincidence. But the futures market really only has about a 24% probability that the Fed is going to move on interest rates at that meeting. Do any of these sentiment indicators say anything about what Fed policy might be going forward?

LIZ ANN: Well, I think Fed policy uncertainty has actually been another factor, aside from just the aforementioned muscle memory behind why sentiment has been subdued. I think that will continue to be kind of a depressant on sentiment. And I think you’re right, as we get closer to the Fed meeting, particularly if the chatter around the potential for rate hikes picked up, I think sentiment could take a hit for those investors that are a little nervous about what that might mean for stocks.

RANDY: That makes a lot of sense. Well, guess what? We’re already out of time, Liz Ann. Thanks for the great information.

Listen, if you want to read more from Liz Ann, of course, you can get her commentary in the Investing Insight section of, and you can follow her on Twitter @LizAnnSonders, and 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. 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, 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.

Ned Davis Research (NDR) Crowd Sentiment Poll® is a sentiment indicator designed to highlight short-term swings in investor psychology. It combines a number of individual indicators in order to represent the psychology of a broad array of investors to identify trading extremes.

The Chicago Board of Exchange (CBOE) Volatility Index (VIX) is an index which provides a general indication on the expected level of implied volatility in the US market over the next 30 days.


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