Morgan Stanley recently published a report that argues the rally in European markets isn’t over yet, despite recent Bearish activity.
Using data from the American Association of Individual Investors, one can see that the market has recently become very Bearish.
Here’s the graph Morgan Stanley created from the data.
But this information is made more complex by another Morgan Stanley chart, which purports to show that this is merely a transitional period into the tightening phase that comes after the post-recession boom.
Of course, none of this answers the crucial question of where the market is heading in the short term. Morgan Stanley thinks we still have a ways to go before tightening officially begins:
Morgan Stanley: Our tightening checklist helps us decide when to position for that next phase. We believe it is premature to call for the start of the tightening cycle, because some pivotal events to indicate the start of the tightening phase have not happened yet: for instance payrolls are still negative, Fed language has not changed yet, and budget deficits are still expanding, not contracting, in 2010.