The news is coming fast and furious these days, and as I type, we are experiencing a 10-1 day, meaning we have 10 declining stocks for every one advancing issue on the market today. The down volume on Nasdaq is at 93% versus up volume of 7% as I type! I can't seem to find any "news" regarding the negative PPI report today (positive for inflation), as the market is completely obsessed with weak retail sales and other "bearish" news items.
What is getting discounted is the "bad economic news." The evidence? The weekly American Association of Individual Investors (AAII) Bulls/Bears Survey. As of Jan 11, 2008, the percentage of "Bears" = 58.9% and the percentage of "Bulls" = 19.6%. The typical extreme pessimism zone starts when the bulls only number approx 49%, and we are awfully far away from that number. This is a contrary indicator, meaning we are far out-numbered by the bears, and therefore, the market has discounted a recession, or other negative events. Perversely, since most are now bearish, this presumes most investors have already sold their equity positions, and by definition, they are now bearish, and consequently have sold equities, are holding cash, or have gone short. The contrarian idea means that the next logical move is for bears to slowly become bullish again, and by definition, will have to buy back, or cover their shorts, and the market will turn and begin to climb again.
Ned Davis Research did a study on this data set, and concluded anytime bullish reading are below 49%, the average annual gain of the S&P 500 is 17.2% twelve months later.
In addition, the levels of bullishness/bearishness indicated in this survey were most similar 17 years ago. They show us that investors haven't been this bearish since the 1990/1991 recession and Gulf War period.
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