The good news for the stock market is that sentiment remains very bearish, which is bullish. Despite the huge rally in the S&P 500 since 3:10 p.m. on October 4, the Bull/Bear Ratio (BBR) compiled by Investors Intelligence remained under 1.0 for a sixth consecutive week. It was 0.87 this week. Last year, it also dropped below 1.0 just when the market bottomed in early July and continued on to have a great yearend rally. At 41.0%, the percentage of bears is down from last week’s high of 46.3%, but remains as high as it was in early 2009 just before the start of the latest bull market.
There is a good correlation between the four-week average of the BBR and the expectations component of the Consumer Confidence Index, which is compiled monthly by the Conference Board. The fit between the two has actually improved since the start of the financial crisis in early 2007. Recently, I’ve explained the strength in retail sales during the summer in the face of plunging consumer confidence by observing that when Americans are depressed, they go shopping.
In the past, whenever the BBR fell below 1.0, it was a great time to go shopping for stocks. That seems to be the case again now. The consensus is so skeptical that the Europeans will actually solve their debt crisis that sentiment isn’t getting a lift from the powerful rally in stocks. Who is doing the buying? It might be the high frequency traders. It must also be value buyers, who are trained to load up on stocks when bearishness is so widespread.