Investors are trying to determine if this week’s bounce in stock exchange traded funds marks a short-term bottom for equities or is simply a head fake before more selling.
The recent decline in the S&P 500 to a new 52-week low looks to be a “false break,” after which decent rallies often follow, according to Standard & Poor’s U.S. Investment Policy Committee.
“Market sentiment turned quite bearish over the past week, a potential positive for at least the near term. In particular, bullish sentiment on the Investor’s Intelligence poll fell to 34.4% this week while bearish sentiment rose to 45.2%,” it said.
“This is the largest spread favoring the bears since March 2009,” the S&P committee noted. Stocks hit bottom that month after the global credit meltdown.
Stock ETFs have rallied this week after briefly correcting 20% from the 2011 high. [ETFs Defy Bear Market Barometer]
“Even though the market could chug higher in the near- to intermediate-term, we still see the S&P 500 dropping into bear market territory either later this year or during the first part of 2012,” S&P forecast.
Contrarian investors often use sentiment polls to go against the crowd. [Navigating Volatile Markets with ETFs]
“Sentiment is not so easy to interpret,” said Robert Colby at TraderPlanet on Thursday. “Contrary to what many contrarians seem to believe, when advisors turn this cautious, stocks sometimes have much further to fall. Examples include similar levels of bearish sentiment in April 1973 and in July 2008, after which stock prices fell much further.”
SPDR S&P 500 ETF (NYSEArca: SPY)
Full disclosure: Tom Lydon’s clients own SPY.