April 15, 2010

AAII Market Sentiment Signals A Pullback In Stocks

The latest Merrill Lynch Fund Manager Survey is showing the fund managers optimism on stocks. 71 percent of the respondents believe that earnings will jump 10 percent or more over the next 12 months. This is up dramatically from only 53 percent last month. The survey also showed that 52 percent of managers are now overweight equities versus just 33 percent in February. Michael Hartnett, Chief Equity Strategist at B of A Merrill Lynch says the Goldilocks scenario is priced into stocks:

“April’s survey shows a growing number of investors envisaging a Goldilocks scenario of above trend growth and benign inflation. The findings are consistent with the view that the US consumer, far from remaining in intensive care, is on the path back to good health.”

Today’s American Association of Individual Investors (AAII) poll showed the same trend in wild bullishness. Bullish sentiment surged to 48.5 percent. This is the highest bullish sentiment since the beginning of the year. Charles Rotblut at AAII notes that the current skew between bulls and bears is consistent with periods prior to a pull-back, but not representing “irrational exuberance”:

“The spread between bullish and bearish sentiment is at +19. This is a level that has correlated with the past few market pullbacks, though is not a level that suggests irrational exuberance.”

Related ETF`s: iPath S&P 500 VIX Short Term F (Public, NYSE:VXX), SPDR S&P 500 ETF (Public, NYSE:SPY) and ProShares UltraShort S&P500 (ETF) (Public, NYSE:SDS)

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