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Fear Grips Wall Street

There’s a very old saying on Wall Street: Stocks climb a wall of worry and descend a slope of hope.

As the number of “worries” keeping investors awake at night continues to multiply, the stock market keeps pushing higher.

Last week, the venerable Dow Jones industrial average finally broke out to a new 52-week high above its prior peak in January. At last the Dow industrials joins its cousin, the Dow transports, along with the S&P 500 at new highs.

That counts as a reaffirmed Dow Theory buy signal for the stock market.

But in spite of poor investor sentiment stocks keep climbing higher. It’s like a mountain climber reaching for the summit, one foothold at a time, relentlessly climbing the wall of worry.

But where do we go from here?

Well, that’s a bit of a mixed bag.

First, the negatives. In spite of new highs for the Dow, we’re still in a seasonally soft period of the year for stock returns.

Presidential Cycle

Source: BofA, Merrill Lynch

Historically, stocks haven’t fared well during the fall months, often declining in midterm election years from a midsummer peak and bottoming in October, as you can see above.

But perhaps this year’s midterm slump was front-end loaded, unfolding in February–April instead. Only time will tell.

Another negative factor is insider selling occurring at the same time as a slowdown in corporate stock buybacks. During August alone, corporate insiders sold shares to the tune of $450 million worth per day, unloading their own shares at the fastest pace in almost a year.

Sept and Oct

Source: BofA, Merrill Lynch

Stock buybacks have been an important prop for the stock market for many years, but typically buybacks slump at this time of year, as you can see above.

In fact, October is seasonally the slowest month for buyback activity and September is second worst. That means should a market correction begin there’s less corporate buying to support share prices this month and next.

Now the positives: The most bullish of all right now for me is a classic contrarian indicator: sentiment.

It stinks right now and from a contrary perspective, that’s bullish for stocks.

S&P 500

Source: BofA, Merrill Lynch

As you can see in the chart above, investor sentiment toward stocks is near the lowest levels of this year, as measured by the American Association of Individual Investors survey (bottom panel of chart).

It’s amazing that investors’ conviction about stocks can be so poor even as the S&P 500 breaks out to new highs.

And this means there’s still plenty of potential buying power on the sidelines that can propel share prices even higher. That’s especially true if stocks keep surging and mom and pop investors finally jump in fearing they’ll get left behind.

Speaking of potential buying power…

Professional investors aren’t bullish either. As you can see in the chart below. A survey of fund managers shows average cash levels shooting up recently even as stocks move higher.

Fund Manager

Source: BofA, Merrill Lynch

Fund managers are now sitting about 5% in cash, near the highest levels over the past two years. This is another contrarian bullish signal, because when this stash of institutional cash flows back into stocks it can propel share prices much higher.

In fact, the highest cash readings among fund managers over the last 20 years have almost always been great buying opportunities for stock investors, as you can see in the chart above.

Bottom line: There are plenty of reasons to worry about the stock market. Chief among them: trade war worries, high valuations and rising interest rates.

But for me, the fact that so many investors, both retail and professional alike, are already so worried means the path of least resistance for stocks could easily be higher from here.

Here’s to growing your wealth,

Mike Burnick

Mike Burnick
Chief Income Expert, Mike Burnick’s Wealth Watch

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Mike Burnick

With over 25-years of professional investment experience, Mike Burnick was a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. Mike joined Weiss Research in 2002 as an analyst and writer, and in 2008 was named Director of Research and Client Communications at Weiss Capital Management, where he assisted...

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