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