According to CNBC staff writer Jeff Cox, Morgan Stanley chief investment strategist David Darst is “a realist – cautious but not cowering, optimistic but not overzealous.” Says Darst:
“The market’s running. When cookies are passed, grab the cookies and realize they may not come back around again, and it’s not always going to be thus… Nobody is buying stocks, and they will someday. There will be a coil-spring reaction.”
Apparently, such commentary passes for restraint these days. Further, Darst maintains a bear market checklist:
- Is the Federal Reserve tightening monetary policy?
- Are stock price valuations stretched?
- Is investor euphoria present?
- Are bond spreads widening?
- Is there a recession looming?
- Are transportation stocks, small caps and bank stocks retreating?
“Right now we are 0-for-6 in the bear market checklist.”
In addition to the ubiquitous complacency after a 4-year 140% rise in stock prices, what caught our eye is rationale #3 to which Cox added his own journalistic license:
“In spite of the seemingly easy path to more gains for the stock market, which is up the more than 20 percent from its last low required for a technical bull market, there is still plenty of fear in the market… This year has seen the first consistent inflows in stock-based mutual funds since the financial crisis began, but investors are still cautious and pouring just as much cash into bond funds.”
Fear? Let’s go down our abridged investor sentiment checklist:
- Rydex bear fund assets: 16.9% of bull + bear fund assets (93rd percentile of bullishness)
- Rydex money market fund assets: 19.9% of bull + sector fund assets (97th percentile)
- 3-month VIX contract: 16.45 (80th percentile)
- Equity fund cash levels: 3.7% (73rd percentile)
- MMF assets: 17.2% of mutual fund + ETF assets (record low, 99th percentile)
- Investors Intelligence poll: 19.8% bears (87th percentile)
Incidentally, I am not just cherry picking statistics to make my case. These all have proven long term track records as contrary indicators. Such an analysis is admittedly quantitative and never perfect. For a qualitative view on sentiment, simply turn on CNBC. 95% of the pundits are bullish, many of whom justify their optimism because they sense “fear” amongst investors. This is quite delusional behavior, classic of manias – what I refer to as the “double contrary.”