AAII (American Assoc of Individual Investors) survey in longest run of bears v bulls since 1987

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The above headline this weekend stood out like a beacon on a dark night to me. In an environment of constant negative economic headlines emanating out of Europe and the UK, it is worth re-visiting the resolutely bullish stance we have taken at this magazine in recent weeks and check once more the underpinnings of our positive leaning.

1. Equity valuations in Europe & Japan in particular are at generational lows when looking at price to cash, price to book and particularly dividend yields relative to bond yields and yet, retail investor participation is at record lows.

2. Similarly, hedge funds (supposedly the smart money) continue to remain underweight equities and short interest in the US remains at elevated levels.

3. It has struck me too in speaking to a lot of industry participants and traders in recent week just how jaded and resigned they are after suffering 2 years of very difficult years. Let’s not forget too that many retail investors missed completely the powerful 2009 rally, only tip-toeing back into the market during 2010 and then getting hit with the flash crash and a serious shakedown in 2011 2012 has been another difficult year for many, particularly in the more speculative area of the marketplace like the AIM arena.

A look at the weekly S&P chart below portrays to even the most elementary technician that this is not a bearish tale. Every element of that chart to me looks constructive –  a rising RSI (with plenty to go before we reach any semblance of overbought status in the 70’s & 80’s), a confirmatory & positive divergence on the MACD  both of which and indicative of higher prices ahead and also rising weekly moving averages and prices above them (19 & 37 wks in this case). If you look closely at the chart you will see that the market has only turned tail and reversed when the index has risen around 70 – 100 points above the 19 week moving average, currently we are 30 points above it.

S&P 500 weekly chart

Couple the technical situation detailed above with the poor sentiment backdrp and to me, we are odds on for higher prices ahead. Our money is on Japan playingg catch up and vaulting over 9000 in the near term and also on beaten down Europe – the Spanish Ibex and the Italian Mib in particular. I’m not so sure we will get a pullback next week and so we are to re-implement longs on the Ibex & Mib on Mondays opening.


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