Here's something they don't teach you in Economics 101: Too many bulls can kill a rally.
Conversely, too many bears can stop a bear market. It sounds paradoxical, but it's true: When market sentiment gets to an extreme on either side -- pessimistic or optimistic -- more often than not, the trend is near its reversal.
We are not the first ones to pick up on that. Bernard Baruch, a famous rich man from "the roaring twenties," observed this before the 1929 stock market crash:
"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."
Here's also Elliott Wave International president Robert Prechter's comment:
"Extreme opinions, shared widely, constitute the single most reliable indicator of an impending change of direction for a market. If virtually everyone is thinking one way, they have already acted..."
-- The Elliott Wave Theorist, July 2006
Extreme sentiment is not a guarantee of a trend reversal -- no market indicator is. Yet it's worth paying attention to.
"...the latest weekly Investors Intelligence Advisors' Survey has the percentage of market bulls at 54, which exceeds the extreme set at the January high of 53.4."
January, as you remember, was the month the DJIA started an 800-point drop.
Note also that mutual fund managers' cash levels are low -- the rest of the money is in stocks. This chart is from our March Elliott Wave Financial Forecast:
In his current Elliott Wave Theorist, Bob Prechter adds:
"In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than 2007!"
Eduard Hamamjian
GeaSphere
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