Investor Sentiment Seen as Too Bullish for Rally: Taking Stock
By Robert Dieterich
New York, April 5 (Bloomberg) -- Economist Ed Hyman, known for scrawling notes on charts in his daily reports to clients, this week highlighted a graph that he said summed up the U.S. stock market: ``Still high.''
Hyman wasn't referring to the level of U.S. market indexes. Rather, he cited surveys that show investors are still bullish on stocks, even with the Nasdaq Composite Index down by two thirds from its March 2000 peak.
Surveys of investor attitudes show little sign, he and others say, of ``capitulation'' -- trader jargon for a decline in which sentiment turns so negative that the worst selling must be over.
``Maybe this stock market correction won't have a capitulation, but in any case it's pretty clear we haven't had one'' so far, Hyman, chairman of research and money-management firm ISI Group, said in a note to clients.
High levels of pessimism are a contrary indicator, showing that most investors who want to sell probably already have done so. The market may not be able to mount a sustained rally without a surge in pessimism, analysts say.
Hyman, ranked by money managers in Institutional Investor magazine's annual survey as Wall Street's top economist for 21 years, cites the weekly poll of financial consultants by Investors Intelligence newsletter, his own firm's poll of professional investors and data on money flowing in and out of technology mutual funds.
Fully Invested
Money managers are more fully invested in stocks than at any time from 1994 through mid-2000, ISI's survey shows.
Bearishness in the Investors Intelligence poll has averaged 32 percent in the past 13 weeks, said Hyman, whose ISI Strategy Fund has fallen 14 percent in the past year, less than the Standard & Poor's 500 Index's 26 percent slide. At market bottoms in 1994 and 1998, bearishness touched 59 percent and 48 percent, respectively.
Until investors are convinced there's no hope and simply dump their remaining shares, ``the market will be capped consistently by people looking to sell into the rallies,'' said Rick Bensignor, senior technical strategist at Morgan Stanley Dean Witter & Co. Technical analysts try to predict market moves based on price patterns and other statistical or sentiment measures.
Tuesday's 6.2 percent plunge in the Nasdaq was a sign that pessimism may be starting to spread enough, he said. ``We're now seeing more broad-based selling, with very little place to hide, unlike a couple of months ago,'' he said, when certain stocks were perceived as ``safe havens.''
The Nasdaq fell 11 percent in the first three days of this week before surging as much as 6.3 percent today.
Fear Gauge
Among other indicators that investors remain too bullish, Hyman said individual investors have yet to pull their money out of technology stock funds ``to any great extent.''
The Chicago Board Options Exchange's Volatility Index, known as the VIX, is another indicator of investor sentiment that hasn't shown signs of capitulation, analysts say.
The index peaked at 39.7 in March and fell to 36.7 today. At the market bottom in October 1998, when the Long Term Capital hedge fund collapsed, the index surged to 48.6, and in the stock market crash of 1987 it soared to 150.
The volatility index, a measure of expected market swings based on options on the S&P 100 Index, usually surges when investor fear is peaking.
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