The Investor Sentiment Cycle

A number of smart people seem to think that we are at another crucial crossroads for the market. To help acquire and share some perspective on this point, I sent out a private poll yesterday asking over 100 top professionals I know to share their views on where they think we are in this current investor sentiment cycle and why.
Of those who dared to offer take the poll and go on record (most I asked never responded), 63% thought the cycle had already bottomed out while 37% see further downside to go in this cycle.
How did I figure that out? When you look at the overall votes, the most popular response was that we are currently in the hope phase as 26% of those who I polled offered that as their view. This was followed closely by 21% who said we are in the depression phase, followed by 16% who think we are in the optimism phase. If these people are correct, as a combined group 63% of them think we’ve already bottomed out and are headed higher at least in terms of this current sentiment cycle. Please note where each of the three areas of the cycle – hope, depression & optimism – fall within the cycle. After each phase, the market moved higher.
In reviewing the minority votes (i.e. the other 37%), the good news if one can be had here is virtually no one thinks we are anywhere near the top of the market. Instead, the most popular response was that 21% think we are in the denial phase, 12% think we are in the fear phase, and 4% in the desperation phase. Also, note where each of these three fit within the cycle. Following each of those phases, the market moved subsequently lower. But, overall this still consisted as the minority view.
The bottom line, most think the market has bottomed out, as least in terms of this investor sentiment cycle, but reasonable doubts do remain. To provide addition food for thought, here are some of the more noteworthy perspectives offered in support of their particular viewpoint:

“As much naysaying as we are hearing in the media and in the blogosphere, we are still holding above Dow 10,000 – efforts to drive equities below the current trading range have been met with vicious snapback rallies. People are not excited per se, but they are hoping that a reason to be excited will come along soon.” – Joshua Brown, The Reformed Broker
“The market has recovered from the big shock last year, however sentiments in recent months have become very bearish with talk of crash and double dip recession. In recent month growth stocks are doing well and IPO’s have been rallying. This tends to be sign of impending rally in next few months. At this stage the range is likely to breakout to upside in late October.” – Pradeep Bonde, StockBee
“I believe we are in the ‘hope’ stage simply because there are two main camps, 1) some believe we will break higher and above major resistance and 2) some are short anticipating a repeat of early August. The end of August low resembles the March 2009 low because it was a non-capitulatory bottom. As long as we maintain a flag and do not have a breakaway gap down, then the market should be fine. Objectively, we are still in the large neutral range, but I am cautiously bullish here.” – John Lee, Charts Gone Wild
“Somewhere depression and hope. There continues to be a mixed message from economic data and price action which leaves investors hopeful but with an underlying sense of pessimism from the jobs situation.” – Brian Shannon, AlphaTrends
“The S&P is down around 20% over the past 3 years. Mean reversion says it will probably outperform its long-term average over the next 3 years by a large margin. Too bad real life isn’t as simple as that!” – Less Antman, Simply Rich

“This is 1982 all over again. There was no hope due to high interest rates and then they started dropping interest rates. Today there is no hope because of jobs and once there is any sign of job growth, the market will begin to soar as it did in 1982.” – Larry Connors, Trading Markets
“Sentiment reflects reality, so we hit bottom post-Lehman. The depression and capitulation came in March, 2009. The slow and halting economic recovery will be accompanied by improved sentiment — a process including feedback.” – Jeff Miller, Dash Of Insight
“Hard to look back on Fall 08 as anything other than capitulation, followed by a glimmer of hope as 2009 went on. While that puts us beyond the trough, I see more of a public “apathy” than hope…a period of global innovation and startups that the public misses while they stare at mixed US growth reports.” - Derek Hernquist, Integrative Capital
“We provide investment research and money management services to more 1,000 investors and it feels like we are somewhere between Depression & Hope. Overall investor sentiment still seems very negative and even long term investors appear to be fearful of losses and are suspect of the economic and market recovery.” – Justin Carbonneau, Validea
“The global financial crisis and VIX spikes into the 80s were so vivid and memorable – and so thoroughly discussed in the media – that they continue to cast a shadow over investor sentiment and decision-making, even though arguably most of the risks associated with a VIX of 80 have since passed. Disaster imprinting refers to a phenomenon in which the threats of financial and psychological disaster were so severe that they continue to leave a permanent or semi-permanent scar in one’s psyche. Another way to describe disaster imprinting might be to liken it to a low level financial post-traumatic stress disorder.” –Bill Luby, Vix & More

“We’ve just emerged from a bear market, so what’s not to like? After the recent run-up, we’ll go sideways for a year and then move to new highs but a sustained economic recovery will take time. Investors are looking for an excuse to push this market upward.”– Thomas Bulkowski, The Pattern Site
“The period between optimism and fear is now incredibly short. I see it as either flat line between optimism and fear completely bypassing market euphoria and depression. Look to the real clues of the economy from businesses rather than CNBC.” – Jae Jun, Old Schol Value
“The bulls see a higher low and potential breakout from resistance. The bears see waning volume going into said resistance. Consider the economy and we have two parties optimistic about their chances of being correct.” – Darren Miller, Attitrade

“Elevated equity call volume and heavy NASDAQ volume relative to NYSE volume suggest small investors are trying to maintain a positive outlook in the hopes that 2010 marks a consolidation phase rather than a topping phase. Smart money indicators (TICKscore, Last Hour, Market Vane) suggest otherwise.” – Rennie Yang, Market Tells
“The recent rally is smoke and mirrors in the market right now due to the fact that investors don’t know what the government is going to do next. The economy and the market appears to be artificially propped up without making a new high. No one knows how future government policies will affect decisions that are made now based on our unsustainable debt and obligations.” – Chris Perruna,
“One more sell-off in the tank but this shouldn’t undercut the March 2009 low. I would give the sentiment cycle a 2-year window with the ‘Despondency’ phase kicking in for Q1 2011. However, cyclical bull market in play which should keep a modest bullish trend intact for the next 2-3 years.” – Declan Fallon, Zignals

“The long term uptrend since March 2009 reached a top in April 2010. Since then there is a reaction and I think there is fear now that price will not reach that previous top. Basically that will confirm a finished up moving Elliott B-correction wave and a downward C-wave coming soon with much lower prices.” – Sylvain Vervoort, Stocata
“The volume tells me a vast majority of the trading public is not in the markets, and not trading. Many have come to believe the game is rigged against them by the big computers. There is a lot of uncertainty and zero trust. Will that change – sure someday. Reminds me a good deal of 1974.” – Bill Zimmer, The Prudent Trader
“I can’t really place investor sentiment on this continuum. I would say that July 2007 was euphoria, March 2009 was despondency and April 2010 was optimism. However, the last five months have backslid and are more like “stagnation/uncertainty.” – Greg Feirman, Top Gun Financial Planning

So, where do I stand here in this? Interestingly enough, I’m with the majority on this one – the hope phase. From what I’ve seen and everything I know about this investor sentiment cycle, that indicates at least for me the most likely among all of the choices here. The problem, as you know, is that investor sentiment does seem to change by the day as the markets and investors right along with them have become so short-term focused. In fact, one could easily argue that by just looking at the markets since the beginning of August, we’ve gone through the entire cycle in just a number of weeks!
Finally, I must take a moment to offer my sincere appreciation for everyone who took precious time and to offer their personal replies to this unusual, and unexpected poll. Most who I contacted were not willing to go on record, which also is interesting and offers a clue to how much uncertainty there really is out there at the moment. In due time, the road ahead will become far more clear, and as always our #1 job is to make sure to profit no matter which way we go next.