Caution in the Face of Investor Euphoria

We have witnessed a record market gain in the last 2 months where the DJIA has gone from $7400 intraday low to $9333 for a gain off the bottom of 26%! We are right back to where we were in July when we started the correction.

July 8, 1998 Projections: S&P500 Level _______$1148_______ p/e 1998 Earnings_______ $50.00_______ 23.0 1999 Earnings_______ $52.50_______ 21.9 Sentiment = 58.8 4wk avg=57.2% DJIA=9049 http://www.suite101.com/discussion.cfm/i...

November 7, 1998 Projections: S&P500 Level _______$1112_______ p/e 1998 Earnings_______ $49.50_______ 22.5 1999 Earnings_______ $51.50_______ 21.6 Sentiment = 55.5% DJIA=8975 http://www.suite101.com/discussion.cfm/i...

November 29, 1998 Actuals: S&P500 Level _______$1192_______ p/e 1998 Earnings_______ $49.50_______ 24.1 1999 Earnings_______ $51.50_______ 23.1 Sentiment=66% DJIA=9333 found at http://www.suite101.com/discussion.cfm/i...

Market peaked July 18 and sentiment was 70% with 4 wk avg = 65% see: http://www.iqc.com/chart/default.asp?sym... and http://www.suite101.com/discussion.cfm/i... which interestingly shows that investor sentiment lagged the market

What is interesting is I issued this statement in bold type on July 16th.... "Last time the market corrected, 70% were bullish." http://www.suite101.com/discussion.cfm/i... At that time, I made a mental note to reallocate to less in equities from 95% but only got to 90%. This time I am moving faster.

What does this all mean? I think we will see sentiment increase. It might only be days or weeks until we hit 70% and then we will be ripe for a correction. I think we can now say the last two times investor sentiment reached 70% we had a correction

Some conflicting data:

The latest "Timer Digest" now has 8 bulls, one neutral and one bear for the top 10 Newsletter writers. (For the Record, Bob Brinker is not in this list as all newsletter writers.) 8/1=800%!!! We are at near record levels on the market as well as valuations and sentiment is once again very bullish.

For the period 8/21/97 to 8/21/98, the "Timer Digest" Survey had 2 Bulls, 2 neutral and 6 bears on Aug 24, 1998 when the DJIA was at 8533 and it later dropped to 7500 before it recovered. 2/6=0.33%

Who is right? The sentiment numbers we usually use are from a large sample size, but probably include the permabears. Is it more accurate to lower the sample size to the top ten writers as they have the best recent history? These writers are very bullish.

My thoughts: We will see the overall trend of the market continue to go up, but it will be bumpy at times. Interest rates are lower than when we had the last correction which supports higher valuations. There is also a feeding frenzy for internet stocks which follow no logical valuation model. This could spill over to the overall market further driving valuations up. My plan is take some profits to get down under 90% so I have cash for buying on dips or surviving a real bear should one surprise us all. Prudence is a more valuable trait than greed to a wise investor!

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