Stuck in Neutral


With plenty of positive…and negative…news floating around about the global economy and markets, it can be difficult for investors to assess if they are properly positioned for whatever their long-term and short-term investment objectives are. After six years of generally rising stock and bond prices, they don’t want to get slammed e.g. the early 2000s and 2007-2009. But they also don’t want to go “Humpty-Dumpty” and assume the sky is falling. Given the confluence (good SAT word?) of evidence, it is hard to blame them. We see emphasis on “neutrality” in outlook in several of the indicators we follow at Sungarden, including our Sungarden® Stock Scoring System. From a fundamental and technical standpoint, we see fewer screaming long-term buys than we have in some time, yet we also don’t see too many situations that signal pending disaster.

We have learned over the years that by looking closely at the current condition of the 100 stocks (50 Dividend-oriented and 50 Growth-oriented), we can draw some general conclusions about the broad stock market’s reward/risk tradeoff. Today, that puts us in the neutral camp, though ready and willing to pivot as conditions dictate.

One indicator that seems to summarize the neutral-ness of today’s environment is the US Investor Sentiment Indicator series. It is published by the American Association of Individual Investors (AAII), who describes it as follows:

The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.

While this index is notoriously volatile in the short-term, as you can see above, the percent of Neutral opinions has been in a generally rising trend since the bull market began six years ago. Our take is that over this period, the shock of the horrendous market conditions of late 2007-early 2009 have gradually given way to a sense of uncertainty. After all, the stock market is way up over this time, but that probably has more to do with the psychological impact of suppressed interest rates than a “normal” economic expansion. And while we cannot point to a definitive historical signal generated by the Neutrals being near a 6-year high, we can add this to list of items to be aware of as the market’s emotions get sorted out.

Regardless of what we think, however, we are always balancing the opportunities for reward with those for major risk. It is fair to say that lately, that balancing act leads to more neutral conclusions than decisive ones in the many indicators we follow.


(c) Sungarden Investment Research


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