Average Investor Too Bullish

By MarketWatch

ANNANDALE, Va. (MarketWatch) -- Finally, after a nearly 70% rally, a large number of bears are throwing in the towel.

And that's bad news, since it means the wall of worry that the bull market has been climbing is crumbling.


Consider the average recommended equity exposure among the shortest-term stock market timers tracked by the Hulbert Financial Digest. Over the last 24 hours it jumped another 6.5 percentage points to 65.2%.

That's the highest level since late December 2006, more than three years. As recently as early November, the average stood at just 3.2%.

A similar story is being told by the sentiment survey conducted weekly by the American Association of Individual Investors. In that survey, organization members visiting the AAII website are asked to report whether they think the stock market's trend is bullish, bearish, or neutral.

To consolidate those three percentages into a single barometer, researchers often calculate the ratio of the bullish percentage to the total percentage of those that are either bullish or bearish. That ratio currently stands at 68.2%, which is the highest level since February 2007.

Finally, consider the sentiment survey conducted weekly by Investors Intelligence, the latest of which was released this morning. That survey is based on the percentage of monitored newsletters that are bullish, bearish, or neutral.

The ratio of bulls to those either bullish or bearish now stands at 74.1%, which but for slightly higher readings in the last couple of weeks, is the highest since October 2007, the month of the stock market's all-time high.

The bottom line? Market appreciation over the coming weeks therefore will have to come without the sentiment winds blowing in stocks' sails.