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U.S. Stocks: Today's Market Sentiment Starkly Contrasts 2009's
How extreme sentiment can signal a trend ready for change

By Bob Stokes
Thu, 24 Jan 2013 17:30:00 ET
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In March 2009, stock prices were at a 12-year low, and the Dow Industrials were down 54% from the 2007 peak. 

You'd have needed to search far and wide to find someone calling for a rebound. Most investors feared that more of the same was ahead for stocks.
 
But on the very day the Dow hit the 6,547 price low (March 9, 2009), a Wall Street Journal headline read:
 
Dow 5000? There's a Case for It
 
At the time, a closely watched sentiment index had also reached an all-time low at 2% bulls.
 
Even so: Just days before stocks bottomed, Bob Prechter said this to subscribers:
 
I recommend covering our short position at today’s close. ... Probabilities for further decline immediately ahead have shifted. ... The market is compressed, and when it finds a bottom and rallies, it will be sharp and scary for anyone who is short.
 
The Elliott Wave Theorist, February 2009
 
Indeed, the market did rally. Granted, the duration of the uptrend has lasted longer than anticipated. Yet that has led to extreme investor complacency. Look at this chart from the Jan. 23 Financial Forecast Short Term Update (labels removed):
 
 
 
As you probably know, the CBOE Volatility Index, or VIX, is a measure of investor fear (or the lack thereof). You can see on the chart how fearful investors were at the end of 2008 and leading up to the March 2009 low. That's a stark contrast to the lack of fear you see above. Investors are as comfortable with stocks as they were around the Dow's 2007 all-time high.
 
A recent headline, quoting the head of JPMorgan Chase, is indicative of the broadly optimistic sentiment.
 
US Stocks At 'Very Good Prices'
 
CNBC, Jan. 24
 
Is this the time to tap into the current uptrend, or should you separate yourself from the crowd in anticipation of a turn? Well, the Jan. 23 Short Term Update referenced the strong emotions that attend the end of long market trends and then noted:
 
It's difficult to lean against the crowd and doing so doesn't automatically mean that you'll be right. There are never guarantees. But the odds are in your favor.
 
Please know that EWI does not recommend defying the crowd for its own sake. To be sure, a contrarian can get trampled during the strongest parts of bull markets, or mauled during the worst part of bear markets.
 
A prudent investor looks at the best available evidence before deciding how, when and if to act.
 
Be assured, dear reader: Your risk-free review will likely be one of the most important investments you make at this juncture.
 

 



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