Is Investor Sentiment Sending the Ultimate “Buy” Signal?

Published Fri, Jun 10th, 2011   Louis Basenese, Chief Investment Strategist

It’s Friday in Wall Street Daily Nation. And that means we’re pausing our regular commentary-based articles and instead using charts to highlight the most important investment and economic news of the week.

And as you’ll see in a moment, it might be time to get busy buying!

Forget the Bears… It’s the Bulls Who Are Deep in Hibernation

Investor sentiment sucks.

Sorry to be blunt. But nobody’s in a chipper mood…

The latest survey from the American Association of Individual Investors (AAII) reveals the bulls, not the bears are in hibernation. Bullish sentiment just hit a new low for the year.

Traditionally, the S&P 500 rallies when sentiment plummets. But the two are moving in lockstep… for now.

Moreover, the latest ABC News/Washington Post poll shows the number of people who believe the country is on the “wrong track” is on the rise again – up to almost 70%.

So what’s got everyone so down in the dumps? The same two usual suspects – real estate and the unemployment situation, of course…

In a Funk Over Jobs (Still)

The man on the street – who’s been out of work for two years – doesn’t want to hear the economic ditty that unemployment is a lagging indicator. He wants the job picture to improve ASAP.

However, as we shared last month, the recovery in the job market has been historically slow. And sadly, it’s getting slower still. In fact, the latest data confirms that the job recovery just stalled.

Is it any wonder the 15 million or so unemployed Americans are in such a funk?

 

A Real Estate Bummer

While everyone enjoyed the go-go days of soaring real estate prices, the downturn has delivered a crushing blow to housing market participants and the broader economy alike.

The latest real estate price indexes reveal that homes are worth about as much as they were a decade ago, on an inflation-adjusted basis. And prices are still falling. Talk about a double-whammy.

Time to Be Brave and Buy Stocks?

In the end, we can’t ignore such strongly negative sentiment. It definitely influences market prices.

If you need proof, consider the most recent market activity.

In the wake of  mounting negativity, the S&P 500 is on track to fall for the sixth consecutive week. That’s only happened 16 other times since 1928, according to Bespoke Investment Group.

But I’m not trying to scare you out of the market. Far from it.

For as Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”

So while everyone is voting stocks down at the moment, based on bad real estate and employment data, the long-term fundamentals remain compelling.

Keep in mind that corporate profits are expected to jump by double-digits again this year. And the average stock is relatively cheap, trading for about 15 times earnings.

Bottom line: If you’re invested for the long haul – and can stomach being contrarian – all the current negativity could prove to be a timely indication to start buying.

Ahead of the tape,

Louis Basenese

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