Investor sentiment is a great indicator. It pays to be bullish when everyone else is bearish, and vice versa. The problem is that there are many sentiment measures, and they hardly ever point in the same direction. At any given time, a bull and a bear could each produce convincing arguments that they had staked out a contrarian position because everyone else was on the other side.
For example, the current issue of Barron's features a semi-annual poll of professional money managers. 59% describe themselves as bullish or very bullish, a statistic that was quoted by at least one bearish economist to bolster his negative view. However, he didn't point out that in the same survey, 58% of those same managers said they believe that the stock market has not yet bottomed, despite the Dow's 6469 low in March. That widespread disbelief in the current rally seems like a very bullish sign.
I read many blogs every day on my Google Reader (a great invention!). My sense is that most of the investment blogs favor the bearish side. Birinyi Associates excellent Ticker Sense blog maintains a weekly sentiment poll of prominent investment bloggers and currently shows bears outnumbering bulls by 39% to 28% (the rest are neutral). I was particularly struck by one recent blogpost which highlights a bullish report by an economist. It drew 58 reader comments, 45 of which were negative (and mostly of the "you must be crazy to think that things are getting better" variety).
I don't know whether we've seen the bottom, or which way the market will go in the coming weeks or months. But I do know that the start of the next bull market will be marked by plenty of initial skepticism. The most prominent bears, those who gained fame for having correctly forecast the current economic disaster, won't suddenly turn bullish at the bottom. They'll be fighting the tape all the way up, until they finally fade away.
And consumer behavior will follow a predictable path, swinging from fear to greed. Prospective home buyers are currently very cautious because they think that home prices are still declining. However, eventually it will become apparent that the housing market has bottomed and is turning up. At that point sentiment will shift (and probably rather quickly) from fear of overpaying to fear of missing a great deal. Similar great deals in airfares, cruises, and consumer durable goods will quickly disappear.
I've been slowly adding to positions over the past month. I also added two new stocks to the portfolio: Nokia and Exxon. So here's the updated list: ABB Ltd, Boeing, Caterpillar, Cisco, DuPont, Exxon, General Electric, Google, Goldman Sachs, Intel, New York Times, Nokia, Procter&Gamble, Slumberger, Sysco, and Walgreen.
My favorite stock right now is probably Sysco Foods. I'll write about it in detail after they report earnings next week. Also, the current market advance won't continue forever, so expect to see a reversal at some point. I'm not smart enough to catch the short-term moves, but I remain confident that the market will be much higher in the next few years.