When Low Bullish Sentiment Is Not Bullish

This week's AAII survey of individual investors shows only 21% bullish toward the stock market. This to some means "it is time to buy" (see "Bullish Sentiment Plummets to Credit Crisis Low").

Were only stocks in the midst of a new bull market! Then, this contrarian view believing stocks are a good buy here might hold water. However, in a bear market sentiment works differently. You might say a wider disbelief (i.e. less bullishness) removes the greater fool to whom shares might be sold, thus leaving stock prices with a less stable floor.

Need proof?




The above data is not from the American Association of Individual Investors. Rather, this is the consensus of more savvy investment newsletter writers surveyed weekly by Market Harmonics. Insight into how a low bullish sentiment can be misread still is much the same.

Set your sight on July 2008. Following a sell-off taking major stock indexes below lows set in March 2008 the percentage of bullish investment newsletter writers likewise fell below its March 2008 low, reaching about 27%. Surely, observers of this data who possessed a misplaced, bull market mindset thought this an opportunity to buy stocks (just as now). Subsequently, a relatively uneven market recovery resulted in the bullish percentage rising to 40%ish by late-August, 2008 — still relatively meager looking back over the stock market's more positive years prior to 2008, and so, no reason for those wrongly possessing a bull market mindset to think anything but positively toward stocks.

The stock market's September-October, 2008 bloodbath demonstrates how diminished bullishness might be rightly regarded during a bear market. Unlike the case in a bull market, where a diminished bullish consensus reveals a wealth of unbelievers yet to buy in, in a bear market this might be seen as circumstance weakening the floor supporting stocks. In a bull market detractors eventually are likely to chase prices higher, whereas in a bear market they simply will stay away, providing no bid at a time when the market most needs it.

Dating 401(k) Safety: Act II

(If you haven't read Act I, you might want to do so before reading what follows...)

Here is something any safety-minded 401(k) investor ought to be thinking about right now...

Back in 2008 when the U.S. financial crisis was boiling hot there was a period when a few money market funds "broke the buck," meaning these funds traded at less than $1 per share. This could happen again over months ahead, and on a wider, more damaging scale.

What can you do, then, to better ensure the safety of your retirement savings (assuming you have switched out of stock investments and moved the proceeds into a money market fund)?

This is a tough question. There are several possible scenarios of varying seriousness threatening what normally are thought safe investments: money market funds. Still there's good reason you might consider assuming the worst and planning for this as best you can.

What is the worst? Well, let's just say money market fund losses could far exceed the 3% losses some funds experienced in 2008. Indeed, some money market funds could completely evaporate.

Listen, I am not about to engage anyone who would polyannishly claim the odds of a profound crisis hitting money market funds is slim to none. Risk is extraordinarily elevated — like never before! — and that is where I will leave this discussion.

Still, the question remains: what can you do? The answer is whatever you can to get your 401(k) savings into short-term U.S. Treasury securities.

Does your 401(k) plan offer a money market option exclusively investing in U.S. Treasury securities? If so, your worries are over. If not, what's your next move?

The path of least resistance might be to send the following letter to your company's Human Resources department:

Dear [name],

I am saving for retirement in the company's 401(k) plan and I am extremely concerned about the safety of my savings. Since I desire a comfortable retirement, the safety of my savings is very important to me.

That is why I am writing to demand you contact our 401(k) plan administrator and insist our 401(k) offer an investment option allowing employees to shelter their retirement savings in a fund strictly investing in short-term U.S. Treasury securities, and nothing else.

If our 401(k) plan administrator, as is likely, defends the safety of money market investment options presently available in our 401(k) plan, kindly inform this person that Wall Street's credibility being very near zero these days begs extreme caution. When it comes to money market investments there is nothing safer than short-term U.S. Treasury securities.

Please let our 401(k) plan administrator know in no uncertain terms, there are times when protection of principal (my savings and the money it has earned!) is a foremost priority. This is one such moment. Proof is seen by how badly financial regulatory agencies have been behind the curve over recent years. Like Wall Street, they have become untrustworthy.

As I said at the start: the safety of my retirement savings is extraordinarily important to me, particularly right now. I am begging your help.

Sincerely,
[your name]

If you can do better, knock yourself out. Be sure to cc: your 401(k) plan's administrator (i.e. the investment firm). Likewise, enlist your co-workers to join in the effort.

The path of least resistance presented here simply is intended to help you protect your principal in such a way as won't cost you a dime.

Bottom line... In troubled times ahead the price for believing your retirement savings are safe in your 401(k) plan's money market fund might prove astronomical if that fund is investing in anything other than the safest securities of all: short-term U.S. Treasuries.

Dating 401(k) Safety

Well, it has been a year since I last wrote here and you know what? My message hasn't changed.

Seek safety NOW. Your 401(k) is at great risk if your savings are invested in the stock market. I can only say this louder following the shock of May 6, 2010.

The lesson of that day's late-afternoon collapse is, in fact, frightful. There is a very real possibility that, sometime over months ahead we could witness a period where the stock market becomes more or less dysfunctional for days on end.

Why? Well, why does "why" matter when all the reason for fearing the worst has been vividly revealed? If complete dislocation can happen for an hour (as occurred on May 6, 2010) it can happen for a week or longer.

The real risk here, particularly if you are inclined to doubt, is that as this warning begins to bear out, you finally decide to switch your 401(k) investments out of stock funds and into a safe money-market fund ... only to discover you cannot get out because, as there simply are not enough interested buyers operating in the stock market, your 401(k) plan manager is forced to halt redemptions.

Listen up! At the epicenter of what happened on May 6, 2010 were companies millions of investors own: Proctor & Gamble and 3M. Buying interest in these giants simply evaporated.

Had this happened to, say, Build-A-Bear then maybe my warning could be considered extreme. However, Proctor & Gamble and 3M both are companies that have been in business for many decades! They're not about to disappear — not by a long-shot.

Truth is if it happened once, it can happen again, and on an even broader scale. May 6, 2010 delivered fair warning, loud and clear. A more prolonged dislocation in the stock market will badly affect any 401(k) invested in stocks when it clearly is the wrong time to be taking such risk. Act now and you will prevent this.

Now, if the stock market's advance over the past year since I last wrote here has you thinking I am some clueless, nervous Nelly, may I interest you in a trip down memory lane? The lesson of that experience ten years ago is a gold mine to the 401(k) investor who understands the difference between the "long-term" and one's lifetime.

401(k) Recovery: Seek Safety NOW

In the aftermath of the derivatives-fueled financial crisis of 2008 a recovery seen in a rebounding stock market predictably ensued. Yet there still is good reason to doubt last year's crisis was in fact solved. Postponing resolution of profound financial and economic imbalances really is no solution at all. The risk of a spectacular, systemically threatening collapse following on last year's difficulty remains very real. So, ready yourself.




Are you prepared if the stock market resumes falling? If so, then five years from now your 401(k) savings should be swimming in the green while others see their net worth sinking in a sea of red.





Shocking! The widely quoted Dow Jones Industrials Average could fall to 3600 tomorrow and still remain in a long-term uptrend. Of course, nothing is set in stone, but a devastating blow like this might happen as soon as later this year. Will you be ready to gain great financial advantage when it does?

In the simple matter of managing your 401(k) the time for Plan B is upon us. Sheltering savings in the safety of a money market fund, now, allows you to sidestep any approaching disaster.

Opportunity awaits those who, today (and always), avoid risk like the plague. The view expressed here is founded on the timeless wisdom of employing 200-day moving averages in a strategy for managing your 401(k)'s investments. The S&P 500's 200-day moving average continues falling in spite of the stock market's recovery since March.

Due caution is well-advised by the possibility an outlier of profound consequence could suddenly develop. Realizing the depth of fraud that has been allowed to run rampant in both the private and public sectors, Plan B, indeed, appears a most reasonable posture here.

Morningstar: A 401(k) Death Star?

I received a letter from Morningstar today. Danger I find within it! The degree to which risk in the stock market can be downplayed these days is frightening. Here's what the letter said...

Dear Fellow Investor,

The year I started at Morningstar, interest rates were spiking and the NAFTA-inspired Mexican equity bubble became a panic. That was 1994. Since then, we've seen a Russian default mess, an Asian meltdown, the bursting of the Internet bubble, the attacks of 9/11, two wars, the subprime housing collapse, and much more than you care to read here.

In spite of all that, we still managed to experience a huge bull market, and most of the top money managers and investment firms are still standing.

What's the secret? Buy-and-hold investing still works, while trendier strategies have their moments and go bust. This down market is a great time to invest with good managers--provided you're in it for the long term. You just have to know where to put your money.

The stock market has gone nowhere for more than ten years. So, I am not at all clear on this "huge bull market" experienced over the interim.

Just very briefly ... "invest with good managers" ... be "in it for the long term" ... "know where to put your money" ... your response should be duh, duh, and duh. No kidding!

Of course "buy-and-hold investing" still works! However, I would challenge the author to show me a portfolio of stocks (out of the thousands traded) — a portfolio (or fund) that's widely available to 401(k) investors — whose performance over the past ten years outmatched the strategy I advocate.

Diversify your 401(k) investments in fund choices 100% committed to the U.S. stock market, but only when your risk of loss is low. Otherwise, move your 401(k) savings into a safe money-market fund. Plan "A" and Plan "B" — very simple.

Here's my record ever since I began using this strategy (and broadcasting my position)...

• January 2000: Moved 401(k) savings to money-market fund
• February 2003: Switched out of money-market fund and into funds 100% invested in the U.S. stock market
• May 2008: Moved back into money-market fund
• November 2008: Switched back into funds 100% invested in the U.S. stock market (largely a short-term, speculative play)
  

So, what's the risk of loss in the stock market right now?

Believe it or not, for the moment it is slight. That's not to say, however, there's no reason to be concerned and alert.




The consensus opinion of investment newsletter writers is no "be all, end all" indicator. In other words, widespread bearishness does not guarantee the stock market will move higher. Yet it does increase the odds. (Since most money managers fail to outperform the S&P 500, you can look at investment newsletter writer sentiment as a "contrary indicator." Generally speaking, if they're too bullish, watch out for a falling stock market; if they're extraordinarily bearish, stocks could pop.)

As for supposing the stock market's long-term fortunes look bright, all because there is a ton of bearishness among investment newsletter writers, just look at last year's record. The message is clear. The stock market can fall hard even amidst sentiment typical at bottoms. Like I said, this is no "be all, end all" indicator.

And don't lose sight of the fact all major stock indexes currently trade below their respective 200-day moving averages. There's good reason to remain concerned about the future here.

For now I agree with Morningstar's positive view. However sometime in the not-too-distant future I believe their bent might prove dangerous to most investors.

Risk should be a concern of every 401(k) investor, particularly in light of the fact that, when it comes to your retirement time is of the essence. You simply cannot afford taking big losses.