Investor sentiment is troubling as the vast majority of the sentiment indicators I follow are showing excessive optimism. Whether it be hedge fund managers, investment advisers or newsletter writers the consensus in unanimously bullish. Former "Chicken Littles" suddenly have a greater appetite for beta. The following excerpt from an article in the WSJ captures the current mood:
The market's record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.
When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.
This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.
The economy is stumbling along and profit growth has slowed to crawl. The full effects of the tax hikes and the sequester have yet to be felt as spending habits do not change on a dime. A slowing economy with more headwinds ahead is not the ideal environment for profit growth. Valuations are full even with profit margins at record levels. It is difficult to see where further profit growth will come from.
Up until now the large float shrink has kept me from getting too bearish. But as we approach the seasonally weaker part of the year with the market even more stretched I am more likely to act on my bearish inclinations. The bears, if there are any left, may be coming out of hibernation soon.