Why Rising Bullishness Could Derail Stocks

"Why Rising Bullishness Could Derail Stocks", found at BusinessWeek.com, discusses how surveys and experts feel as if the mood of investors could be changing from pessimism to optimism. Measures of investor sentiment tend to become more bullish well after a stock market rally has already begun, as large numbers of people are persuaded to become buyers as the market moves higher and higher. Experts have been watching for overconfidence in individual investors, as this would be a sign that the rally is ending. However, recent surveys have shown mixed results in regards to whether or not the market is becoming bullish or bearish. Investors Intelligence's weekly survey of 130 investment newsletters showed the percentage of advisers bullish on the stock market rising 2.2 points, while the latest American Association of Individual Investors' Sentiment survey showed bullishness falling from 48.5% to 38.1% over the past week. Chief investment strategist at Robert Baird, Bruce Bittles, believes there is a split between professionals (who recognize the strength of the economic recovery) and the general public, which is still wary even after a 79% rise in the S&P 500 since March 2009. While surveys measure what the investors are saying, fund-flow data measures investors behavior and what they are doing with their money. According to this data, investors have pulled much of their money out of U.S. equity mutual funds and put money in the less risky bond mutual funds. John Merril, CIO at Tanglewood Wealth Management says, "The pessimism is pretty thick, the sentiment out there is pretty ugly". He feels this is due to people's unhappiness with politicians in Washington and an anger directed toward financial institutions that "stack the deck" against investors. Many other investing experts also cite the political climate for investor's continued pessimism, mentioning how people don't like policies being developed by Democrats in Congress and the White House. Another clue that could tell of added optimism among investors, is the exchange-traded funds indicator. According to experts, above average flow into ETF's have tended to occur before market declines, while above average flows out of ETF's tend to occur before market rebounds. Since the beginning of February, a net of $12.8 billion flowed back into ETF's. Sentiment is changing among investors and there quite possibly could be a turning point.