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The Two Biggest Reasons To Be Bullish Right Now

 May 22, 2012 10:13 AM


(By Louis Basenese ) The current view "from above" hardly inspires enthusiasm…

The eurozone's crumbling… and at a seemingly increasing rate.

The largest internet IPO in history, Facebook (Nasdaq: FB), hit a snag. After only two days, it's already trading below its offering price.

U.S. companies put up less than impressive earnings. In the first quarter, only 59.5% beat expectations, which is the second-lowest reading since this current bull market started.

Worst of all, stocks are selling off. Last Thursday, the S&P 500 closed at its lowest point since January 17. And the Dow endured its eleventh loss in 12 days.

So, is the sky truly falling? Is this bull market finally giving way to a bear market? Is it time to bail on stocks?

[Related -The S&P 500 Just Completed an Impressive 477-Day Run Above its 200-DMA]

I don't recommend it, Chicken Little. And here are the two most compelling reasons why…

No Time for Love, Dr. Jones

Love is the last emotion individual investors feel for stocks right now.

In fact, the latest reading from the American Association of Individual Investors (AAII) reveals that only 23.6% of investors are bullish right now. That's the lowest weekly reading since August 2010.

This sentiment is influencing action, too.

For 12 weeks in a row (and counting), investors yanked money out of U.S. stock mutual funds, according to the Investment Company Institute.

On the other hand, money flows into bond funds, perceived as a safe haven, increased to $7.6 billion last week. That's the highest level in five weeks.

[Related -Gravity Returns - The Market Drops Nearly 5% in 3 Days]

Clearly, investors are scared of stocks right now.

As it turns out, Wall Street strategists share a similar disdain for stocks.

Based on the latest Bloomberg survey, the country's top strategists only recommend a 52% allocation to stocks. That's the lowest allocation since March 2009.

"I'm with the strategists," says Enis Taner of RiskReversal.com. "There are just too many warning signs from other markets like FX, Treasuries and credit."

Really, Mr. Taner? Did you miss that bit about strategists being this bearish right before stocks hit rock bottom in 2009?

Coincidence? I think not. So you can keep your warning signs. I'm going to keep my Sir John Templeton: "The time of maximum pessimism is the best time to buy."

Or more simply, I'm treating all the negativity as a contrarian indicator. For good reason, too.

A recent analysis by Bespoke Investment Group demonstrates that stocks tend to rally when nobody loves them. Specifically, when the bullish sentiment reading from the AAII survey is the lowest, the S&P 500 rallies the most.

When the reading dips below 25%, like it is now, "The S&P 500 sees positive returns 86.24% of the time," says Bespoke.

Historically, the returns are meaningful, too. Over the next three and six months, the S&P 500 rallies an average of 5.3% and 9.6%, respectively.

Bottom line: In the oft forgotten words of Humphrey B. Neill, "When everybody thinks alike, everyone is likely to be wrong." So with everyone hating on stocks right now, we have every reason to love them.

Ahead of the tape,

Louis Basenese

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