Climbing the Wall of Worry

Stock markets, at least the major developed ones, have been looking very “toppy” for quite a few months now, from both a technical and fundamental standpoint, yet still they have run higher as volumes have contracted, itself not a healthy sign. Even the, “Sell in May and go away ” history did not work this year as the S&P 500 was up by 11% over the period to the 1st November instead of falling in value.

As technicians we like to study sentiment indicators, as they often act as a contrarian play, whenever everyone is bullish it usually pays to head for the exit and when the herd are super-bearish and there is blood on the streets, it usually indicates a major buying opportunity.

Through this column we have often commented on sentiment indicators, including the above and the recent, “At the Margin,” observations, which together with the excitement over the recent Twitter IPO provides anecdotal evidence in respect of current investor super-optimism.

Today it’s worth a look at another excellent sentiment gauge, the Investors Intelligence Advisor Survey which is conducted by Investors Intelligence (www.investorsintelligence.com). Cut-off for the poll is Friday, and the results are released to the media the following Wednesday.

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The good folks at Elliott Wave International (www.elliottwave.com) have kindly shown a chart of the Dow Jones Industrials, wave pattern omitted by us as it’s proprietary to EWI, which shows the latest bull/bear ratio from the survey. It has surged to 3.54, its second highest reading since the bear market rally commenced in March 2009. The only higher level occurred in early April 2011, just weeks before the start of a 22% slump for the major stock-indices. They add the old chestnut that bull markets climb a wall of worry, but there is no worry shown here.

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