(This is an excerpt from the March 23, 2012 blog for Decision Point subscribers.)
A recent news release caught my eye and I thought the story could use a little clarification.
Bullish Sentiment Among Active Traders Jumps to Highest Level in Four Years, Says New Schwab Survey
SAN FRANCISCO, Mar 22, 2012 (BUSINESS WIRE) -- Charles Schwab today released new data showing that active traders are turning more bullish and plan to invest most of their tax refunds in the stock market. The latest Charles Schwab Active Trader Sentiment Survey polled 421 individual investors who trade frequently (at least 36 times per year) and found 51 percent of respondents now consider themselves bullish, the highest level seen since Schwab began tracking active trader sentiment in April 2008 and compared to just 25 percent in October 2011. Only 14 percent say they are currently bearish. (Full story)
Highlighting renewed confidence in the markets, roughly three-quarters (77 percent) of those expecting a tax refund this year plan on investing at least some of it. In fact, more than half of respondents (53 percent) say they will invest most of their refund into the stock market, nearly doubling from 28 percent last year.
This is the first time I have heard of this poll, but I think it is interesting because it polls active traders, a group not covered by any other major poll of which I am aware. Unfortunately, we don't have the Schwab survey dataset for charting purposes, but we can still look more deeply into the story. First, the headline reports the "highest level in four years," which is true, but the survey is only four years old. Let's take a look at what the market was doing during that time.
By coincidence, the S&P 500 Index at the time Schwab began the survey was at about the same level as when the most recent survey was taken; however, in April 2008 the trend of the market was down, whereas the current trend of the market is up. So it is not surprising that sentiment is more bullish now than in 2008 -- investor outlook tends to follow the trend.
While the percentage of bulls (51%) is the highest ever for this poll, there simply isn't enough history to know if that number represents the top of the normal range. The survey has not even existed during a complete bull/bear cycle, and it will take another decade or so to before there is sufficient data to know where the extremes of the range will be. That said, after looking at how other, more venerable sentiment polls have behaved over the years, I think the range will eventually be something in the area of 50-55% for a high and 20-25% for a low.
While is is generally accepted that sentiment polls are normally looked upon as contrary indicators, Schwab's news release has an upbeat tone regarding the high bullish reading:
“With major indices nearing record highs, our active trader client base is becoming increasingly optimistic,” said Kelli Keough, vice president of active trading at Charles Schwab. “As confidence improves and these bullish traders more eagerly embrace the market, we are seeing them adopt trading strategies that can help them manage risk and generate income.”;
Certainly, there is a period during a bull market when the bulls are right, even when there a lot of them, but I don't think I will ever look upon an abundance of bulls as a particularly good thing. Of course, Schwab's objective is different than mine.
Conclusion: The Charles Schwab Active Trader Sentiment Survey is useful in that it polls a new and distinctive group -- active traders -- but it s human nature that people's outlook, no matter what group they are in, will become more positive when the market is behaving in a positive way, and I think we will find that this poll's results will be similar to that of other polls.
The fact that the poll currently has the highest number of bulls ever in it's four-year history is somewhat meaningless since there is no long-term dataset to provide context. All we can say is that it is more or less consistent with other polls in that currently they also show high percentages of bulls.
