Tue 6 May 2008
Stock Markets – Which Way José?: Poll Results
Posted by Prieur du Plessis under Stocks, Money, Markets, Investment
I posted an opinion poll on the outlook for the US stock market a few days ago. In essence, the post asked whether we were in a bull market, bear market or “muddle-through” market.
In order to try to gain more clarity on the issue, I asked readers to express their opinions on the direction of the Dow Jones Industrial Index by posing the following two questions:
• Where do you see the Dow Jones Industrial Index by June 30, 2008?
• Where do you see the Dow Jones Industrial Index by December 31, 2008?
Before sharing the poll results with you, I thought it could be of interest first to have a quick look at the specific stock market environment that characterized the voting period. As shown by the graph of the Dow below, the market was generally bullish during the six-day voting period, although the second, third, and fourth days (when a significant amount of voting took place) were down days.
Source: StockCharts.com
The reason for focusing on the market situation at the time of the poll is simply because people are very often influenced in a big way by the environment at the time of casting their votes.
A total of 944 people participated in the June poll and 829 in the December poll, answering as follows:
The following observations are gleaned from the results:
1) The normal distribution of the June results assigns a smaller probability to the outlying index values (i.e. tails). This indicates that most participants are sticking to index values not deviating substantially from the current index level over the next two months.
The distribution of the December results assigns a bigger probability to the tails. This points to a larger number of participants expecting the stock market to deviate significantly from current levels by December 31.
2) 84.6% of the participants were neutral (19.7%) or negative (64.9%) regarding the outlook for June 30. The figure decreased somewhat to 74.8% (made up of 11.8% neutral and 63.0% negative) for the December 31 period.
3) The weighted average index level is 12,338 for June 30 and 12,083 for December 31. These figures represent declines from the current index level of 12,970 of 4.9% and 6.8% respectively for the two measurement periods. (This compares with a Citigroup institutional client survey expecting gains of 3% to 5% for the S&P 500 Index by year end.)
The results seem to lie in the same direction as one of my previous polls (April 20, 2008) regarding the stock/bond ratio where 70.3% of the participants did not see stocks outperforming bonds over a six-month period.
However, a recent Barron’s poll among US professional money managers showed a different result, with 88% of the participants in the “bullish/very bullish” (50%) and “neutral” (38%) categories. Furthermore, 90% of the managers considered the US stock market to be “fairly valued” (35%) or “undervalued” (55%).
Where do the poll results leave us? Are the results consistent with a contrarian view that the herd mostly tend to be on the “wrong side” of the market, i.e. should the bearish readings perhaps be interpreted as bullish? These are perplexing questions as the stock market edges higher in the face of a deteriorating economic environment. Whereas I am doubtful about the longevity of the rally, I am also not in the Armageddon school. Is the answer perhaps a “muddle-through” market, characterized by below-average returns? That is my hunch, for what it’s worth.
PS: Barry Ritholtz (The Big Picture) could unfortunately not take up the challenge to test his readers’ prediction skills against those of the Investment Postcards readers as a result of a major revamp of his website. Don’t worry, Barry, there will be many more opportunities to show your readers’ skills.
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May 6th, 2008 at 1:18 pm
Sorry, such polls are of little value to me; like “Consumer Sentiment” polls, they tend to reflect (a) what the media is telling them at that moment, and (b) their personal interest in an outcome that reflects their pain or happiness.
May 6th, 2008 at 2:54 pm
to be or not to be contrarian…..
i am familiar with many so called contrarian indicators - put/call ratio, sentiment indicators - and i understand the intuition - if there is too much of the market positioned one way than then only real future direction is the other way - however, i’m not convinced this analysis style is any better than any others, i.e. fundamental, technical, astrology……
are there any studies that show the success of these contrarian indicators over long time periods? are they more likely to work in short periods (3 - 6 mths) or longer periods (1yr+)?
i would imagine that the results would be mixed, much like other analysis styles. i think its difficult to fully gauge, and the market is too dynamic to capture in a snapshot.
from casual observation, i do believe that people take extra pride in considering themselves to be “contrarian”. nobody wants to be like everyone else. however, i think, especially recently, the contrarian approach has been overused. i’ve seen/read too many pm’s and analysts talk about being calm during this crisis, and how you have to be buying when everyone is selling.
is there really blood on the streets? i just bought white shoes…damn.
thanks for your blog, it provides a lot of variety of analysis and opinion.
May 6th, 2008 at 3:38 pm
Richard: Stock market sentiment (as opposed to the various consumer sentiment readings) is always worthwhile monitoring, and the poll is an attempt (albeit not very scientific) to guage that. It is really at extremes where it becomes very useful, but less so when treading water as the somewhat mixed-up poll results seem to indicate.
May 6th, 2008 at 3:44 pm
Justin: It is dangerous to be contrarion simply for the sake of being different. Also see my reply to Richard’s comment.