“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”–Warren Buffett, Berkshire Hathaway 2004 Chairman’s Letter.
There are signs everyday that the fear, uncertainty and doubt which plagued the stock market since the demise of investment banks Bear Stearns and Lehman Brothers in September are dissipating. Sentiment indexes are making huge leaps, confirmed by this morning’s University of Michigan Consumer Sentiment Index for April. The index rose to 61.9 from 57.3 in March; for comparison the index reached a three decade low in November at 55.3. Consumer sentiment is a critical measure for our economy because it is largely driven by consumer spending which by far the largest component of our Gross Domestic Product (GDP).
Furthermore, the Advisory Sentiment survey from Investors Intelligence shows that the percentage of bullish advisors is now greater than the percentage of bearish advisors. Advisors are another key indicator because they are the investment professionals and newsletter publishers that are paying the closest attention to market trends. The bull/bear ratio has climbed very quickly over the last four weeks. If you look at this indicator over time–in particular since the beginning of the recession–it serves as a contrary indicator. Sentiment was extremely positive back in mid and late 2007, when the market was at its most expensive level, then cratered along with the market reaching low points in October of 2008, December of 2008 and early March of 2009.
In our weekly newsletters, The Enterprising Investor’s Guide, we utilize a sentiment indicator which tracks the percentage of NYSE stocks selling above their 30-week moving average. Again, the rapid rise in this indicator has been stunning. After a prolonged period of unbelievably bearish sentiment beginning in October of 2008 and lasting until mid March, we have seen our indicator jump from below 10% to nearly 50% in just five weeks time!
There is no doubt that we are starting to see some encouraging data emerging from financial companies as well as the macro economy, but we now urge caution. The bulls have taken control very rapidly, and this is either the beginning of a new bull market or the late stages of a bear market rally. After a rise in the S&P 500 of 29% from its lows, we are seeing a rush of buyers who do not wish to miss out on the rise in stock prices. If this is just another bear market rally, then these investors will be burned once again, having missed the bulk of the run up. Even if we are in the early stages of a new bull market, it would be better to wait for a retreat before getting too carried away on the buy side. At Ockham, we prefer to heed the warning by one of the greatest investors of all time, be fearful when others are greedy.