They're Bullish -- and Skittish

Sentiment appears rosy, but there is a lot of caution under the veneer of complacency.
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There's a lot of chatter these days about the growing complacency of market participants, if not their outright bullishness. Yet in a classic case of "gaming the game," a lot of folks have decided everyone else is too upbeat, causing them to turn (or remain) bearish. Similarly, few, if any, skeptics have changed their outlooks, suggesting the recent multimonth highs for major averages didn't cause a spike in short-covering or towel-tossing by the bears.

In sum, maybe sentiment isn't so rosy after all, even if traditional measures reflect a strong streak of bullishness across various types of market participants. Consider the following sentiment gauges:

The CBOE Market Volatility Index, a measure of implied volatility of S&P 100 options, traded below 17 last week for only the second time in the past five years. The index (a.k.a. "the old VIX") rose 2.2% to 17.95 Monday as the Dow Jones Industrial Average fell 0.5% to 9765.53, the S&P 500 slid 0.6% to 1047.11 and the Nasdaq Composite lost 1.5% to 1941.64.

Since Sept. 1, the CBOE's put/call ratio has been above 1.0 only three times -- Sept. 10, Sept. 30 and Oct. 31. After hitting a recent low of 0.61 on Nov. 4, the index approached 0.90 Monday.'s Investors' Intelligence and the American Association of Individual Investors surveys each continue to show bullishness at over 55%. Surveys at and also suggest a predominance of bullishness, albeit less dramatically.

State Street's Investor Confidence Index, a relatively new gauge of institutional investors, rose to 104.2 in October, just below its July peak of 105.4.

Equity mutual funds had inflows of $17.3 billion in September, according to the Investment Company Institute. While down from $23.4 billion in August, that put year-to-date equity fund inflows at $97.5 billion vs. $18.6 billion of outflows in the first nine months of 2002.

Against that backdrop, it's hard to argue sentiment is anything other than upbeat, even wildly so. Yet, other sentiment measures suggest there's little conviction among the bulls, according to Jason Goepfert, president and CEO of Sundial Capital Research, a St. Michael, Minn.-based firm that publishes

In addition to a still-high percentage of public shorts among the overall short positions in

Big Board

stocks, Goepfert also cited "almost schizophrenic behavior" among smaller traders as reflected by flows into funds offered by Rydex. A few days of advance generate inflows into Rydex's leveraged bullish funds, he noted, while the opposite occurs after every 2% to 3% decline.

"I don't recall a time traders were so eager to jump -- either they're completely bullish or bearish -- there's no middle ground," Goepfert said Monday. "I'm intermediate-term neutral because I'm seeing these shifts with every small wiggle in the market. It's like a boat being rocked side to side."

Meanwhile, commentary from many Wall Street sources continues to be tilted toward the negative. Ike Iossif, president of Aegean Capital in Chino Hills, Calif., believes the ratio of assets in those same Rydex funds Goepfert cited point to an intermediate market top.

A Deep Pool of Worries

Heading into Monday's session, the main topic of conversation was about how poorly the equity market reacted to Friday's robust employment data, and the negative implications thereof.

"The market's recent lukewarm response to positive economic and corporate news surprises could be a prelude to an interim correction within its ongoing cyclical bull market," commented Richard McCabe, Merrill Lynch's chief market strategist.

The market's inability to rally sharply on the employment data is a "blatant sign that investors have already factored these positive expectations into its current value," according to Schaeffer's Investment Research in Cincinnati. "Such a situation can lead to weakness, as any unmet expectations could very well cause added selling pressure."

Schaeffer's remains upbeat about the market, especially the tech sector, but "the current environment warrants whatever 'defensive' measures you employ to ensure that 'unexpected' drawdowns don't catch you completely off guard."

Others reaching similar conclusions included Jeff deGraaf, senior technical analyst at Lehman Brothers: "This is a very short-term development, and may be rectified, but ... the notion that markets bottom on bad news and top out on good news is more than just a clever axiom, it's a useful guide in determining the extent to which sentiment or the various factors driving the markets have been fully discounted."

Such sentiment seemed to hold sway Monday as selling pressure increased as the session progressed, albeit amid sluggish volume of 1.2 billion shares on the Big Board and 1.7 billion shares over the counter.

Concurrently, a prime topic of debate is the timing of future


tightening, generally considered to be a negative development for financial assets. In sum, there are more pundits arguing why the market has already stalled vs. why it should continue higher.

"We still think the markets are rolling over here," Jeffrey Saut, chief equity strategist at Raymond James, opined Monday. "If, as we believe, the stimuli of the refi-afterburner, tax cuts, deficit spending and tax rebates currently 'washing' through the economy are going to fade, then we should be seeing the peak of the momentum in the economic and earnings numbers right here."

Given the market is a forward-looking mechanism, substantially higher equity prices "should require the economy to accelerate from

third-quarter 2003's heady plus-7.2% GDP pace, and we just don't see that in the cards," he explained.

By his own admission, Saut missed the S&P's move from 995 to its recent high around 1062, having previously forecast the salutary effects of those aforementioned one-shot events had peaked.

"I'm pretty stubborn but not inflexible," Saut said, naming "a couple of quarters of continued strength in economic numbers

and a continuing surge in earnings" as factors necessary to change his point of view.

But "we've borrowed a lot of growth and earnings momentum from 2004," he argued. "If you believe that, then valuations are optimistic again. We're back up on the high diving board."

From that vantage, a growing number of participants see jagged rocks below, rather than inviting waters. Notably, that runs counter to the prevailing wisdom that Wall Street is currently swimming with euphoria.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.