On July 31, we noted similarities between the present day and summer 2010. Sentiment, especially at extremes, can be a contrary indicator for stock prices. Present sentiment readings are similar to those found on August 26, 2010. The S&P 500 rallied 30% from August 26, 2010 to April 29, 2011. From the American Association of Individual Investors (AAII) on current sentiment:
Bullish sentiment fell to nearly a two-year low in the latest AAII Sentiment Survey. Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 8.0 percentage points to 22.2%. This is the lowest that optimism has been since August 26, 2010. It is also the 68th lowest bullish sentiment reading out of more than 1,300 weekly readings in the survey’s history. Optimism has now been below its historical average of 39% for 16 consecutive weeks.
Market professionals presently have similar expectations for Fed intervention to those found in early October 2010. The S&P 500 gained 19% from October 1, 2010 to April 29, 2011. From CNBC:
Markets now overwhelmingly expect significant action from the U.S. and European central banks, according to the latest CNBC Fed Survey. In the survey of market participants, 89 percent said they believe the European Central Bank will purchase more sovereign debt and 78 percent said they expect the Federal Reserve to undertake additional quantitative easing. The results are similar to those from October, 2010, a month before the Fed launched QE2, when 93 percent of respondents predicted the QE2 program.