wmeubank@ocp.kcmo.com
THE OPTION ADVISOR
Prepared by
Investment Research Institute, Inc.
In addition to standard fundamental and technical analysis used by many analysts and market timers, the extra element that we constantly examine is sentiment analysis, which tells us the level of greed or fear among investors and speculators relative to the underlying fundamental and technical aspects of the market. Sentiment among many market participants is relatively bullish, which would usually cause concern for those "contrarians" who blindly do the opposite of the majority. But by integrating the bullish fundamental factors and the powerful technical uptrend, such optimistic sentiment has only slowed the rate of uptrend, as opposed to causing a serious decline. For example, if the underlying factors imply a 20% annualized growth rate in stocks, then periods of optimism (where investors have already bought) may result in a slowdown to a 10% annualized growth, whereas periods of pessimism (where investors have already sold) may result in a 30% annualized growth rate, with the change occurring as we move from one extreme to the other. If there is no underlying trend and we start at 0%, extreme optimism will result in a loss of 10% and pessimism causes a gain of 10%. The point of this exercise is that sentiment cannot be analyzed in a vacuum, but rather must be measured against the relevant underlying drivers of the market. Throughout the 1990's, the gains of this bull market have been ultimately accelerated by an underestimation of the bull market's prospects from the opinion leaders. Currently, we do have a very powerful technical trend and we have had 17 consecutive quarters of more positive than negative earnings surprises; now, those bullish factors are being recognized by investors, as seen in the optimistic sentiment readings. It would take some adverse change in the earnings trend or a significant technical price decline to concern us about more than just a pause in this long-term bull market. We recommend that you stay fully invested, as the hardest part is not getting out of the market, but rather knowing when to get back in for the next bull market upleg.
July 2, 1997 Price Headley
Investment Research Institute, Inc.
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