Is Market Pessimism So Widespread?
by Charles B. Carlson, CFA
Dow Theory Forecasts

Conventional wisdom says that markets do not bottom until bearishness is so widespread as to be virtually omnipresent. It is only at that point of mass pessimism that the seeds of a sustained rally take root.

Of course, measuring sentiment is a tricky thing, and evaluating sentiment in the current climate is especially difficult. Indeed, on the one hand, plenty of anecdotal evidence seems to suggest that many individual investors have given up all hope concerning stocks, their fear turning to downright apathy. We have all heard the stories - at the country club, in the work cubicle, at the family reunion - of investors who have been beaten up badly by the market and have bailed entirely on stocks.

On the other hand, tools that help quantify sentiment show a mixed picture. In fact, while it is true that confidence has been eroding, sentiment indicators still show that many individuals are far from sharing the apocalyptic predictions being spouted by some market watchers.

For example, it is noteworthy that despite four-year lows in the Dow Jones Industrial Average and six-year lows in the Nasdaq Composite, the percentage of bearish investment newsletters (as measured by "Investors Intelligence" advisory service) is still under 35%. In other words, most investment newsletter writers still don't buy the fact that the market is in a bear market.

A similar pattern is seen in consumer sentiment. A popular gauge for measuring consumer sentiment is produced by the University of Michigan. This index gauges consumer confidence by taking into account attitudes concerning both the present economic climate as well as expectations regarding future economic conditions. The latest sentiment reading shows that consumer confidence has moved to around its lowest levels since the mid-'90s. Still, at a time when the U.S. appears to be on the verge of war in the Middle East, when major market indexes are hitting multiyear lows, and when fears of a double-dip recession grow by the day, consumer sentiment is down but certainly not at historically low levels.

To be sure, using consumer sentiment as a surrogate for investor sentiment is not perfect; not all consumers are investors. Still, with roughly 50% of U.S. households having exposure to the stock market, consumer sentiment is worth considering when gauging how individuals feel about the stock market. Indeed, conventional wisdom says that if consumers were all that worried about the stock market, they wouldn't be spending as aggressively as they have been over the last year.

That both consumer sentiment and investment newsletter bullishness have not declined more dramatically could suggest that the widespread pessimism needed for a market bottom is still not present.

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