That’s a question that’s been on a lot of folks minds, and Mike O’Rourke of BTIG provides an answer, which basically comes down to: Sometimes extreme bullish sentiment is simply justified.
It was 2003 when the Unemployment Rate peaked and commenced its descent earlier in the decade. The peak for Unemployment during this cycle is 10.1% in October 2009, but few would call the improvements since then a descent. We perpetually focus upon Initial Jobless Claims because when
they are declining in a recovery, equities are usually rallying. Chart 1 below depicts the improvement of Initial Jobless Claims and the per cent change in the S&P 500 from the start of 2003 through early 2004.
Chart 2 is the same except that it starts at the beginning of 2010 and runs through today. In both cases, when Initial Claims begin declining, the S&P 500 rally continues steadily. One key
difference here is that April 2003 was the peak in Initial Claims for that cycle, but this cycle’s peak occurred in March of 2009. Where we expect a parallel is that both of the moves were the ones that preceded a decline in the Unemployment Rate.
As we know, since August, Initial Jobless Claims have dropped by more than 100,000, and they remain on track for additional improvements in 2011. We suspect that in August, a phase similar to April 2003 commenced.
Returning to sentiment, late 2010/early 2011 appears to be very similar to the 2003 scenario. Chart 3 below illustrates the AAII Bulls and S&P 500 gains for 2003. One will notice that the level of bullishness was high throughout most of the year. The average level of bullishness from May through
January 8, 2004 (37 weeks) was 56%. Remember, today’s level of concern is 55.88%.
Chart 4 is the same but instead depicts bearishness. The average level of bearishness from the start of May 2003 though the first week of January 2004 was 21.5%. One can see that despite the persistent bullishness and minimal bearishness, the 2003 equity rally was undeterred.
The bullishness was for the right reasons and people were still out of position. In the respective charts, we overlaid the 2010 level of bullishness and bearishness. What that shows is that we are only just now starting to hit the levels of optimism that were reached in May and June of 2003 and persisted into early 2004. Earlier we discussed the spread between bullishness and bearishness, which is 37.63. In the 26 weeks between August 21, 2003 and February 12, 2004, there were only 8 weeks where the spread was tighter than 37.63. During that 6 month time period, the S&P 500 rose 15%. Sentiment is bullish now, and it is likely to get more bullish. This is probably the rare scenario where the crowd is correct.