What Sentiment May Portend

By on July 25, 2010

Paul Lim, N. Y. Times, writes about the recent swoon in sentiment and what it may mean for returns going forward. Lim cites studies by James Stack, editor of the InvesTech Market Analyst newsletter, and Brian Belski, chief investment strategist at Oppenheimer. Stack pointed out the July 8th study showing the ratio of bears to bulls was greater than 2.7 to 1.

Historically, when the bear-to-bull ratio has risen above this level, the Dow Jones industrial average has posted gains of 5.4 percent and 11.4 percent, respectively, after three and six months, he noted in a recent report. To be sure, not all sentiment gauges are signaling that investors are throwing in the towel on stocks.

Belski’s Findings:

On the one hand, a couple of traditionally defensive areas of the market — health care and consumer staples companies, which aren’t terribly dependent on a strong economy — have traditionally done well 12 months after extreme pessimism sets in.

But two economically cyclical sectors of the market — specifically, technology, and consumer discretionary stocks — have actually done better. Tech stocks in the S.& P. 500, for instance, have historically been up more than 14 percent one year after market pessimism has sunk to extreme lows.

Source: N. Y. Times

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