The individual sentiment data reported last week by the American Association of Individual Investors shows bullish investor sentiment rose over six percentage points to 47.4% from last week's bullish sentiment reading of 41%. This reading is below the average plus one standard deviation of the bullish sentiment reading. The 8-period moving average of the bullish sentiment reading increased to 43% from 42% last week. At the market top near the beginning of 2000, the 8-period average was in the high 50's and even hit 60 at one point. In short, sentiment is elevated, but does not seem to be at an "extreme" level yet.
- how likely is the financial sector to incrementally grow 2010 earnings by $8 per share on average, and
- how will Washington policies: cap and trade, health care, etc., impact company earnings
Much is made of the benefit of running deficits during economic slow periods. In 1937, the Roosevelt administration and the Federal Reserve reversed liquidity measures taken to fight the Depression. This is thought to have resulted in the double dip during that time period in addition to some other factors that were not pro-business (see my post, Positive Equity Market Returns Probable In 2010). The key though is how is the deficit money being spent. The deficit funds need to be spent in productive ways that create an environment that put the jobless back to work in the private sector and not the government sector.
In summary, sentiment and allocation data appear elevated but not at extremes. At the same time the market's forward valuation does not appear too stretched. This does not mean dive head first into the market. Being selective in the companies one invest in could still provide adequate returns in 2010, but not without experiencing some volatility.