Why Investor Optimism May Be a Red Flag

[Elmore Furth]

When the dumb money is going into a market, it is time to get out.

By PAUL J. LIM
Published: December 25, 2010

NOW that the market has risen, investors are becoming optimistic again about stocks.

There are many signs of this. The American Association of Individual Investors, for example, reports that most investors now describe themselves as bullish, versus just 20 percent in July.

And the flood of money that was pouring into bond funds largely out of fear, has slowed to a trickle. After pulling in more than $1 trillion in net investments since the start of 2001, bond funds experienced slight net redemptions from the start of November to the middle of December, according to the Investment Company Institute.

All of this suggests that investors are finally getting their risk appetites back. And it may also be an indication that people are becoming greedy after the easy money has already been made in the market.

INDEED, some market strategists worry that investor optimism itself may be a headwind to another strong year for the market. Consider how stocks performed in other recent periods of optimism. In October 2007, a survey by the American Association of Individual Investors found that 55 percent of investors were bullish; in the 12 months that followed, the S.& P. 500 fell 37 percent. Similarly, in March 2000, investor bullishness reached 66 percent. And a year after the fact, stocks were down 25 percent.



Why Investor Optimism May Be a Red Flag

[toastbutter]

1. bingo

im a contrarian. Buy pain, sell euphoria!

[oldtime dfl_er]

2. I'd rather go to Vegas

to do my gambling, personally.

[Lost-in-FL]

3. !

:thumbsup:

[Statistical]

4. Which casino has a positive expectation of 8% per year going back over 100 years?

I will book a room there next summer.

[Art_from_Ark]

11. It's not the stock market, that's for sure

A theoretical investment made in 1911 of $72.94 (=the lowest point of the Dow that year) would be worth a whopping $160,000 today if left untouched at 8% interest compounded annually. The Dow's theoretical return (compounded annually) would be more like 5.25%, which is what bank interest on savings accounts was back in the '60s.

[Statistical]

5. The VIC is very low. That is worrisome.

Most people get scared when VIC is high but when it is low it scares me. Means people believe they shouldn't buy protection because market is going only up. Usually that is the moment it isn't.

SPY options are insanely cheap right now. Easy to pick up some 10% downside protection via PUT spread.

[femrap]

6. Thanks for the info....

I think the market will have a bad January. So maybe I should get out my gambling $$ and buy some puts this coming week.

[Crazy Dave]

8. It sure will. As soon as the tens of thousands of temp seasonal workers are let go n/t

[Hydra]

7. The Sheep are going out to get shorn, again

Although I hear commodities are going to be hot again. When you invest in the basics and force the costs up, it's a great way make a fast buck until the customers run out of money.

Better get out before the music stops again, though...

[whattheidonot]

10. debt deflation

the stock market has no foundation. The government has screwed things up big time. the policies of war without taxation and now austerity because there is no revenue will make any recovery weak at best. It will get worse for the working class and they will have less to spread around. Taxes are being forced downward. There needs to be a turnaround on this and Obama is not going to do it. he just showed that. The stimulus is not big enough and the debt is way to large. Other nations will not hold our debt. it is killing them too. So it is either the fat cats or the rats. The country is headed for hard times. Cannot finance a country like this.

[lutzsuarnaba]

12. U.S Share Dealing for UK Citizen

Can anyone recommend a U.S based institution that allows a UK
citizen to sign up and speculate in the stock market? It needs
to be okay for a UK citizen to sign up and would not need a
U.S social security number.

[Warpy]

9. I'm in it for the income, not the net worth

and fully expect at least one more huge dip down the line, especially with a GOP house preventing anything sensible being done over the next two years.

Sic transit glorious money. As long as my income stays 50% of what it is now, I'll have no decrease in standard of living.

As a general rule, when you start getting any investment tips at all from service workers, it's time to get out of that particular investment strategy.