The cover of this week’s Barron’s refers to an article on page 7 with the tease, “Bullish news: Fear is rampant.” The author, Jonathan Laing, cites a report put out by James Paulsen, Wells Capital Management’s strategist and long-time talking head on CNBC:
Also bullish is the fact that investor sentiment is in the dumpster. [Paulsen] calls it “dominance of doubt.” Investors put little trust in bullish developments such as the much-maligned economic green shoots, the sharp narrowing in the yields of all manner of fixed-income instruments over Treasuries, or even corporations reporting better-than-anticipated earnings. This psychology could lead to huge upside price potential in stocks once the bears become converted, he argues.
Leaving aside Paulsen’s credentials as a perma-bull who failed to see the greatest economic crisis since the Great Depression coming, the evidence of bearishness appears thin. For starters, Newsweek declared on the cover of a recent issue, “The Recession is Over!” The “VIX,” a measure of expected volatility (referred to as the “fear gauge”) hit a low of 23.09 on July 24. This was the lowest reading since September 8, 2008 when the S&P 500 stood at 1268, right before plunging 37% in 2 1/2 months. The Investors Intelligence poll, which showed 47.2% of newsletter advisers bearish in early March, is now down to just 26.4% bears. Similarly, the Consensus Inc. survey showed just 18% bulls at the March low vs. 51% today.
Our favorite sentiment indicator is still the asset mix of Rydex bull and bear funds. Currently just 26.4% of the assets in these “directional” funds are betting on the downside. At the height of the credit bubble the lowest bearishness reading was 30.8% on October 31, 2007. At the time the S&P 500 stood at 1549; yesterday’s close was 1006. For perspective, at the March 9, 2009 bottom (S&P 500 at 677), 52.0% of the assets in Rydex’s timing funds were positioned for a further decline.
Contrary to the claims of the bulls, there is no “dominance of doubt,” just a preponderance of delusion.
Note: The Fund’s equity short position was 136% on September 8, 2008, 21% at the beginning of this year, 2% at the March 9 low, and 67% as of yesterday’s close.