BULL BEAR SPREAD

Overview

There was a large increase in the advisor bullishness over the last week, in spite of the bankruptcy of General Motors, and it's delisting from the NYSE, plus a further increase in the unemployment rate to 9.4%. More and more analysts are pointing to an end to the recession by the end of 2009 and with forecasts that the economy will soon be growing again. The repayment of TARP loans by some banks was given as further evidence that the worst is over. Stock markets look to the future and are typically already rallying while the broad economy is still weak.

The bulls jumped over 5% to 47.7%, from 42.5% the previous week. That is their highest levels since the first week of 2008, when their number was declining from even higher readings with the market top that autumn. The bulls are also up sharply from their readings at the bear markets lows from October 2008 through March 2009. As often occurs we noted the fewest bulls, 22.2% at the first bottom last October and then a slightly higher reading at 26.5% in March.

The bears fell to 23.3% from 25.3% the previous week. That is the fewest bears since December 2007 when we counted just 22.4%. During the recent bear market bottom we saw the bears at 54.4% in October and 47.2% in March.

Since advisory sentiment is a 'contrary indicator' the latest bull-bear data must be viewed with concern. One of the elements of the trading since May-8 has been a rush to buy every small pull-back. Money managers who missed the Mar-9 to May-8 surge needed to quickly move into stocks in case markets moved higher still. The increase in optimism suggests they are much more committed now.

For the fourth week in a row, the bears were exceeded by the correction group. Their number fell to 29.0% from 32.2% last week. This group is mostly bullish but they expect an intervening market retreat before the rally begins. They look to buy on dips. Advisors often shift from bearish to correction before they are ready to make a bullish commitment.

The difference between the bulls and bears was +24.4%, up from +17.2% a week ago and still moving in the wrong direction. Readings over +20 are negative while at the October 2007 high, there were +40.6% more bulls than bears. The spread was below '-20.0' at the recent bear market low, a great time to buy.