I mentioned last week that bullish sentiment was getting a bit frothy. After a few weeks of record highs, expectations that stock prices will continue rising had surged.

Not quite an extrapolation of recent trends into infinity, but getting there.

This morning, I wanted to address the flip side of that — Bearish sentiment (expectations that stock prices will fall in the near future). This Pessimism remains above historical average.

As I noted all the way back in 2009, this is the most hated rally in Wall Street history. Many participants are unable to pry their eyes from the wreckage in the rear view mirror. This impacts their psychology, investment posture, and allocations.

Consider the initial over-reaction to Cyprus. The swiftness in which the bearish commentariat erupted over the weekend was a wonder to behold. It also was far more revealing of the bears own confirmation bias than anything it said about the circumstances in Cyprus itself.

Some have made a big deal of the January inflows into equities — the biggest in years — as a sign of the top. Perhaps a little context might help put this into perspective: The $20 billion dollars added to U.S. stock funds in 2013 pales when compared to the over $600 billion in outflows from equity funds over six years though 2012. It is also less than half of $44 billion that flows to fixed-income managers in 2013 (ICI).

Thus, we have a market which remains disliked, under-owned by investors, not unreasonably priced, with few alternatives to equities. (Does that sound like the recipe for a market crash to you?)

Let me be clear about one thing: I am not implying in any way an organic rally. The normal 20-30% pullback we might have seen as the economy slowed and earnings weaken has been thwarted by Swingin’ Uncle Ben & His No Limit Orchestra. Any concerns I may have had about a pre-recession 30% correction was shelved once QE4 became imminent. The Fed is erring on the side of doing too much this go round, versus their 1930s error of doing too little.

Perhaps this thwarting of normal cycles accounts for some of the angst we see amongst the bearish contingency. Maybe they will eventually be proven right after missing a 146% move off of the March 2009 lows — a hollow victory at best.

In the meantime, it is helpful to understand what it is that is driving sentiment, in the context of the larger picture.




Note: With this post, I am breaking out Psychology and Sentiment into two distinct categories.


The Most Hated Rally in Wall Street History (October 8th, 2009)

Strategists Most Bearish on Equities since 1985 (August 1st, 2012)

Category: Markets, Psychology, Sentiment

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “What Really Drives Market Sentiment?”

  1. MayorQuimby says:

    As a non-elected representative of the bear community I would like to reiterate that we bears feel like the preservation of purchasing power ie – the value of money should be high verus the Keynsians who feel perpetual debasement is the best path towards prosperity. If fewer and fewer people in the working class are able to retain money thanks to Uncle Ben’s Band, and what little they do make has less and less value, AND productivity gains are going entirely to the corporations (nearly)……please explain again how we are carving out a path to success longer term?


    BR: Well then, you should have been more vocal from 2001-07 when the US dollar lost 41% of its purchasing power. Missing that, and complaining about that today with the dollar at 3 year highs does not reflect well on your breed.

  2. sureseam says:

    The determination of politicians, central bankers, etc to further manipulate a stack of issues that each become more slippery by the minute is unnerving. It throws traders and investors back onto their core experiences and their amygdala beliefs built on those experiences. Once the cohort that lived through a crisis have faded from public debate; then we risk getting a recurrence of something very similar.

    My current way of estimating the general nervousness is not to watch the gold price; but rather to watch the platinum/ gold price ratio. Anyone else?

  3. MayorQuimby says:


    Before you had negative rates, people had an opportunity to avoid the theft of their purchasing power without risk. That is now gone. The complaint is valid in that context would you not agree?


    BR: No.

  4. Manofsteel11 says:

    This is a great piece about short term trading vs. long term investing.
    Why invest? because the market is up and the $ is down.
    Of course, no need to worry about the middle class, student loans and market sustainability if the corporations and rich pile the profits, after all, with this kind of stimulus/stock returns pension funds can meet the baby boomers’ obligations and greater demand is bound to come from somewhere.

    No doubt, QE can go on forever, interest rates can be kept low artificially forever, both the bond market and the stock market can coexist forever in harmony while the VIX will go to zero, and we can have indebted states and municipalities to ignore their fiscal problems – just invest in stock, or better yet, do that while the government sends over printed money in trucks.

    DId I mention a HTF, PE funds stuck without exists at the end of their lives, no reform (yet…) in Wall St, a uniquely inefficient healthcare system, those confusing derivatives, etc.?
    P.S. Did I also mentioned that I am an optimist?


    BR: If by $ down you mean up, well then yes. But sadly, no.

  5. Concerned Neighbour says:

    It’s the most hated rally in Wall Street history for good reason; everyone recognizes that it’s artificial. I actually saw a trader quoted in a mainstream piece of reportage the other day who actually had the guts to tell it like it is, something to the effect, “the Fed won’t let the markets go down”.

    There you have it. Price discovery is totally dead and buried. I laugh when Mr. Cashin talks about a lack of volume and ebullience associated with these daily new highs. Well, how can one be ebullient when you know the markets are so heavily and transparently manipulated?


    BR: it was hated way back in 2009, when following a 57% collapse, traders should have expected a strong snap back . . . they failed to understand history

  6. Petey Wheatstraw says:

    Optimism/pessimism aside, I can’t shake the feeling we’re on another insane train bound to run out of track. The conductor, engineer, and railroad have a history of being batshit crazy. There is no reward without risk, but when relatively safe risks are off the table, folks are fairly justified (and relatively sane), to worry.

    As has always been the case, getting on the train isn’t a problem. Getting off can be.

    How long does one go along for this ride, and will the downside be a gradual stop at a station, or a Thelma and Louise Grand Canyon type event?

    That said, the dollar is a relative thing. Up? Down? Massive QE that isn’t inflationary (again, it’s relative).

    Somebody had better tap the pressure gauge — I have a feeling we’re getting a false reading.

  7. DRR says:

    “$600 billion in outflows from equity funds over six years though 2012″

    So why is the market up 10 trillion since 2009? Who moved the money in? Leveraged POMO manipulations at the fringes to move up the index?


    BR: Individual outflows are modest compared to institutional buying. Pension plans, 401k, Mutual funds, etc.

  8. b_thunder says:

    “Consider the initial over-reaction to Cyprus. The swiftness in which the bearish commentariat erupted over the weekend was a wonder to behold” – That’s fair. But on the other hand does anyone remember what was the initial reaction to the first signs of the 2007/08 fin. crisis:


    While “someone” was beginning to worry as early as July 2007, most were blissfully dismissive of the signs of bubble/bust and kept buying for another year. Subprime funds failures, Bear bankruptcy, etc – nothing mattered to the “Fed will save the day” crowd. Were the “bears” right in 2007 or wrong because they miss out on the final leg of the bull market?

    Is Cyprus too small to cause troubles on the global scale? Yes. Will it kill the “confidence” which is what the Central Banks have placed their bets on since 2008? I tend to think that it just might….


    BR: Its one thing to miss the last leg — 20% or so; its another thing to miss the greatest rally in a century !

    But put what you said into broader context: The failure to recognize the 2008-09 crisis may be why people are utterly overreacting post-crisis. Every general fights the last war.

  9. jbay says:

    I can understand the angst. The PE10 is a bit to high for my liking but what I never hear discussed is why. When I look at individual stocks that have been frothy: KO, PG, MCD, WMT I can’t help but comment that these are all safety plays. So is the market frothy with safety? Look at what: INTC, MSFT, LMT, COP, PSX, JPM, etc. PE ratios have been all the way back to 2009. Mostly below 12 and often below 10.

    So what does one make of the divide between these stocks? Are you honestly going to tell me that LMT or INTC has the less risk then McDonalds?

  10. wally says:

    Since this run started with one of the market lows of at least a generation, you sort of have to split it into two parts: a snapback and a bull market.
    I think we are through the snapback part and are at a point where US economic prospects are looking to keep improving for the foreseeable future… so in a bull market. It’s not quite right to characterize it as one of the longest bull markets when it didn’t start on level ground.

  11. kek says:

    Very well put Barry. We are still in the panic hangover phase, where the macro theorists are driving the train.

  12. MayorQuimby says:

    If you (rightfully imo) invest for cashflow, you HATE this rally.

    Additionally – question for the bulls – how is YOUR cost basis doing?

    Both are problems I struggle with as I look to position my investments during this breakout phase.

  13. [...] What is driving market sentiment?  (Big Picture) [...]

  14. grandwazoo says:

    I failed to recognize the 08-09 crisis in time to pull my money out so in my modest retirement account I have been letting it ride, I am just happy to be back above even. So to me the rally has not been so great or impressive compared to the losses I took. So at this point I took 50% off the table since I have no idea what will happen and consider myself lucky I did not get totally wiped out. If there is a pullback I will get back 100% in the market if not I won’t be missing all the market gains.

  15. josucco says:

    As Barry said, the perception of a QEI caused and is sustaining the rally. The Fed is now buying almost all the new issuance of treasuries and passing it on to their BFFs (who make a tidy profit) to keep rates low/zero. Foreign central banks buy our bonds as a result of trade, so less trade they buy less bonds. Without the Fed buying the treasury would be paying multiples in interest expense (100 bps increase is about $100 billion more in expense). The Fed recently hinted that they would no longer rebate interest back to the Fed if they began taking capital losses on their bonds (and whatever else they have in there). I think this indicates they are getting a bit nervous about the size of their balance sheet. So QEI is not right, there is a limit to what the Fed is willing to take on despite what the Fed or anyone else says. Japan had to kick out their bank chief to go on their binge: a central bank by itself without government interference would never destroy its currency. With vol so low (complacency), we are nearer to the end.

  16. Frilton Miedman says:

    March 20, 2013 at 7:40 am
    ” As a non-elected representative of the bear community I would like to reiterate that we bears feel like the preservation of purchasing power ie – the value of money should be high verus the Keynsians who feel perpetual debasement is the best path towards prosperity. ….”


    Are you aware of the difference between Keynesian and Monetarist?

  17. Concerned Neighbour says:

    BR, I agree the selloff was overdone and a snap back rally as likely. Bargains abounded. No longer. As I currently watch the “markets” price in perpetual Fed pumping for the umpteenth time, I reiterate that price discovery has been an antiquated concept for some time.

  18. kek says:

    If one has an orthodox view of price discovery, then they must believe in efficient markets.

    An inefficient market is a good thing, because it creates opportunity.

  19. Angryman1 says:

    This really would be happening if the FED never did “QE”. The FED shrunk its balance sheet to December.

    QE does not push money. All it does it force banks to write down debt to the debtor in a attempt to spread the risk of debt management. Hence, once debt servicing falls below debt production, QE is worthless.

    That is why QE is done after 2013. Debt production is about to rise above debt servicing in 2014.

    This rally is relief the US economy is expanding. Nothing more or less. People like Quimby just don’t get it. His ideals would force a deflationary collapse and true confidence breech. All debtholders would demand repayment since the US economy cannot produce. His so called precious “currency rebasement” would fail, just like it failed in 1895.

  20. Ahhhh, the good old days — 1930-36 !

  21. beachbum says:

    If “institutional buying. Pension plans, 401k, Mutual funds, etc.” are what are driving the markets, then why is this the most hated rally in Wall Street history? Doesn’t normal mainstreet own a big chunk of the institutional buying you mentioned?

    Also, is this rally sustainable when corporate margins are at near all time highs and a small percentage of folks accumulate the majority of the wealth in this country?

    Like to hear your thoughts BR….


    BR: Yah, that’s mostly automated thru payroll

  22. What pray tell is an ‘underowned’ market? Are there ownerless stocks floating about somewhere?


    BR: Equity Asset Allocation Deviation from Historical Mean — i.e., the Percentage of equity holding by individuals relative to historic averages. See this as an example

  23. ben22 says:

    “The normal 20-30% pullback we might have seen as the economy slowed and earnings weaken has been thwarted by Swingin’ Uncle Ben & His No Limit Orchestra.”

    Apologies if I’m splitting hairs here but I just don’t get this statement. It’s wrong. We did have a 20% correction in 2011, high to low from 1370-1074. No 30%-ers…I’ll give you that. The 2010 correction was quite close to 20% as well….and if we are talking about “sentiment” its probably worth saying the flash crash really got to some people during that 2010 correction. I’m sure you’ve seen all the immediate focus on stocks that have done it since that took place. Maybe you were just referring to 2012 and into this year as earnings have slowed but the market has done another nice lockout rally crushing bears along the way while sentiment has gotten more bullish? My point is, beyond 2008 there have been…we’ll call them events, flash crashes, fiscall cliffs, tsunamis……all things that will shake people up that could be considered the most recent “last war” ….sentiment is tricky like that

    the flip side of your flip side is the belief that the market will never “be allowed to go down” because of the Fed….a belief so strong that people also think there have been no corrections since 2009 at all it seems.

    so, good contrast in explaining the other side of the higher bullish sentiment we have right now but I’m not sure this post answered the question in the title.


    BR: Less than 20% based on closing prices (if the flash-crash didn’t teach you intra-day prices are rubbish, you weren’t paying attention). And kissing 19.X% and immediately reversing on the prospect of more QE, versus a deeper, longer downturn is the point. So yes, you are splitting hairs here.

  24. ben22 says:

    fair enough BR…I was splitting hairs…I hit the send button on that one and wished I had rephrased it

    here’s some anecdotal sentiment for you, but having spent a decade as an advisor I found it kind of surprising, and perhaps noteworthy…asked all my advisor/broker buddies: “getting lots of calls from clients that want to buy stocks?”

    “no” is the consistent answer I get…I just had this conversation with one of them Friday too and they are all trailing the market for the year as they own some fixed income as well and their clients get monthly statements…so its not that. In any event…I do agree with you….all year long I’ve felt like I was watching the most widely called for correction I’d ever seen …..lockout rally defined