Investors Go All-In On Stocks

Investors across the board are all-in again, universally optimistic about the future prospects for U.S. equities.

Advisory sentiment in the Investors Intelligence poll is in the 96th percentile, with a 43% spread between Bulls and Bears.

Investors Intelligence sentiment image

Individual Investor sentiment measured by AAII hit its second highest level of the bull market a few weeks back and the spread between Bulls and Bears is currently elevated at 31%.

Image of Individual Investor sentiment measured by AAII

Active investment managers (NAAIM) are also extremely optimistic, reporting high exposures to equities (92nd percentile).

NAAIM exposure index graph from 2006 to 2014

Most of the time sentiment data is just noise that should be ignored because it is not telling you anything. This is not one of those times as we are at extremes in more than one indicator.

On average, when sentiment is this extreme, you tend to see below average returns going forward. The table below shows roughly flat returns for the market over the next 1-12 months from similar sentiment extremes in the past. This is only a probability of lower returns, of course, as there are no certainties in markets.

Inverstor intelligence sentiment vs forward S&P500 returns from 1969

We saw a similar confluence of sentiment extremes heading into 2014, and the average stock is roughly flat on the year through the first of December.

Russel 2000 small cap index graph

What’s fascinating here is that, unlike last year which followed the historic 2013, investors are extremely optimistic today while the average stock has gone nowhere in 2014. This is an unusual juxtaposition to say the least. Why are investors so bullish with the average stock not moving? Investors are likely swooning over the lack of volatility, continued global central bank stimulus, and strength in large cap shares.

As I wrote recently, momentum and seasonality remain strong here, positive counteracting factors to these sentiment extremes into year-end. But 2015 is a different story in my view, and until this extreme sentiment is worked off, likely to create a more challenging environment for investors.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Edward M. Dempsey Pension Partners New York






Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


Comments are closed.