Fear Has Lots Of Company

As we noted in “What Do 1987, 2003, 2009, And 2015 Have In Common?”:

When investor sentiment reaches extreme levels, it can be a contrary indicator for the stock market. For example, the highest bullish reading in the history of the American Association Of Individual Investors (AAII) Sentiment Survey was 75% bulls before the dot-com bubble popped in 2000. To give you a reference point, the average over the life of the AAII survey is 39% bulls. Sentiment readings can also be helpful when they reach extreme levels of skepticism.

The CNN Fear & Greed Index was sitting at an “extreme fear” reading of 7 during Monday's session. Mid-day on Tuesday it was still sitting at an extremely fearful reading of 15. This type of reading looks nothing like what we would expect to see near a major market peak; we would expect just the opposite…extreme optimism (see the 75% bull reading before the 2000 market peak).

Are There Other Reasons To Keep An Open Mind?

The answer to the question above is “numerous”. In addition to the CNN Fear & Greed Index, a record for investor skepticism, dating back to after the 1987 stock market crash, was recently broken. When markets consolidate, it speaks to indecisiveness or a more equal battle between bulls and bears. We are all familiar with the expression “the market needs to consolidate its gains”. Thus far, 2015 has produced a rare pattern of consolidation similar to ones not seen since 1904, 1934, and 1994. As noted in the table below, all three historical periods of consolidation were followed by big gains in the stock market.

Want More Details?

This week's video provides some additional insight into the “reasons to keep an open mind about bullish outcomes” table shown above. It also covers recent observable damage to the bullish case.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.