Monday, April 22, 2013

Should Investors Be Concerned About the Bullish Sentiment of the Barron's Big Money Poll?

magazine cover barron's hussman
courtesy: TrendFollowing Trader; John Hussman

This weekend's Barron's carried a cover story titled "Dow 16,000".

Barron's semiannual Big Money poll of professional investors set a record for bullish sentiment.  Fully 74% of the money managers surveyed identified themselves as bullish or very bullish about the prospects for U.S. stocks - an all-time high for the Big Money poll going back more than 20 years.

In addition, about a third of the managers surveyed expect the Dow Jones industrials to top 16,000 by the middle of next year, which would represent an additional +10% return from today's levels.

If you are a contrarian - as most investors tend to characterize themselves, in my opinion - the Barron's story is a sure sign of a market top.

Here, for example, is widely followed Wall Street strategist John Hussman (and perennial bear) as quoted on the blog Business Insider:

The Barron’s Big Money Poll is typically bullish, on balance. This is Wall Street, after all. But variations in the tone and extent of that bullishness can be informative, especially when the consensus is extremely optimistic at new highs of mature bull markets, and defensive at new lows of mature bear 
markets. I can’t really throw stones about 2009, as I had my own concerns at the time (relating to the need to stress-test against Depression era outcomes, despite our favorable views of valuation). But it’s worth noting that the 2009 Big Money Poll questioned the advance from the March lows, noting “good reason not to jump in with both feet yet.” The 2003 Big Money Poll – already well into a new bull market – was bullish on balance, and up from just 43% bulls in an October 2002 poll near the market lows. Still, the 2003 poll noted “the bulls’ views have been tempered by the market’s losses in recent years. Consequently their expectations for the Dow, the Standard & Poor’s 500 stock index, and the Nasdaq Composite have been ratcheted down from past surveys.”

This certainly isn’t a criticism of Barron’s itself. I grew up on Barron’s Magazine, and will remain a devoted reader at least as long as Alan Abelson provides a worthy counterbalance to the more short-sighted views of Wall Street and the Market Lab section remains in print. Still, the Big Money Poll is most useful as a contrary indicator.

Rule o’ Thumb: When the cover of a major financial magazine features a cartoon of a bull leaping through the air on a pogo stick, it’s probably about time to cash in the chips.

Now, it may be true that Hussman and other bears are correct, and that there is too much bullish sentiment in market prices today.

But as I take a closer look at the chart Hussman prepared (shown above), I was struck by the fact that earlier Barron's covers were apparently good indicators of an impending market drop, the markets did eventually move higher. 
Put another way, if you had bought when the Big Money poll leaned bullish, you would be significantly ahead today.

The Barron's poll is not consistent with other polls that show a much more skeptical public. 
As I wrote last week, for example, the American Association of Individual Investors showed the largest amount of bearish sentiment since March 2009.  Time will tell which poll was more prescient, but I would be careful to stake any investment strategy on any one survey.

Finally, as I wrote on Friday, recent market activity is not consistent with a wildly bullish investment community. 
The best performing stocks year-to-date have been found in the defensive sectors like health care and consumer staples, which growth areas like technology have been laggards.  Investors have been buying stocks of recognizable companies that pay attractive dividend yields as a way to get more income in a yield-starved world, and not necessarily because they foresee clear sailing for the market.