Worrisome Signs for Stocks

Now that Bernanke is confirmed for another term at the helm of the Fed, some pundits will have you believe that the stocks are safe. It doesn’t matter if he shares a major portion of the blame for current deflationary environment.

Anyway, as  a market contrarian I look for extreme sentiments on markets. Back in March 2009, the sentiment was extremely bearish, which resulted in a multi-month rip-roaring rally in world stocks. As of end of December, 2009 – the sentiment is quite the opposite. there is hardly any skepticism about this rally, which means that the rise is expected to continue. This should worry you if you are a bull.

The following is via Business Week (Pessimism on Stocks Drops to Lowest Since 1987 Following Rally):

Pessimism about U.S. stocks among newsletter writers fell to the lowest level since April 1987, six months before the equity market crash known as Black Monday, following the biggest rally in the Standard & Poor’s 500 Index in seven decades.The proportion of bearish publications among about 140 tracked by Investors Intelligence fell to 15.6 percent yesterday from 16.7 percent a week earlier. Sentiment has improved since October 2008, when the financial crisis drove the figure to a 14-year high of 54.4 percent. After plunging 38 percent in 2008, the S&P 500 has risen 24 percent this year.

Some analysts consider lower pessimism a sign stocks will stop advancing, under the theory that there are fewer bearish investors left to change their minds and purchase shares. Investors Intelligence, based in New Rochelle, New York, has examined forecasts in newsletters since 1963.

You have been warned…