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Nervous Investors Approaching a Trap?

February 21, 2013

It may just be “too much of a good thing” for most investors. 2013 has been off to a fast start. January was one of the strongest first months in some time. But as Bespoke Investment Group reports, this year the period from the beginning of January to Presidents’ Day was the weakest in the last three years. And if 2012 is any indication, stock prices can go still higher before the next correction begins.
-Jerry Wagner, CEO, Flexible Plan Investments, Ltd.


With the S&P 500 reaching new post-crash highs, it is interesting, to say the least, that most individual investors are not bullish on stocks. Rather, as the market has moved relentlessly higher this year, individual investors have turned more and more bearish.

 

 

While these declines do seem to eventually become a self-fulfilling prophesy, the chart above demonstrates that market rallies (that the pessimistic turn often begins in) usually continue for some time after these investors’ opinion on the market starts to sour.

 

It is true that the S&P 500 Index closed up for the seventh week in a row last week, which  has not happened since 2011. But when it did occur thirteen times in the past, the result was a higher S&P a month and six months later almost 70% of the time.

 

Just because the S&P was up so many weeks in a row does not mean that it cannot keep rising. Besides, the six-week winning streaks on both the Dow and the NASDAQ Indexes were broken last week. So to the extent that a run in good fortune means bad news must be on its way, that contrarian belief no longer is supportive with two of the three major indexes.

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