Market Fear #4: Investor Complacency
Click to Enlarge Heading into this pullback, the level of mindless bullishness had reached historic extremes.
Investors Intelligence had the ratio of bulls-to-bears at levels not seen since 1987. Retail investors started pulling money out of bonds and putting it into stocks for the first time since the financial crisis — a classic warning sign that the “dumb money” was getting in. And cash on the sidelines, whether in money market mutual fund accounts or in cash reserves held by mutual fund companies, dwindled to nil.
All the while, market breadth kept narrowing as the foaming-at-the-mouth bulls focused on fewer and fewer stocks to keep the major averages aloft — such as biotech stocks (above) and transportation stocks, which went vertical over the last few weeks. The percentage of NYSE stocks above their 50-day moving averages peaked at 85% in October and has been sliding ever since. It spent most of January near 70%.
It’ll take some severe price damage to reset the situation, and that will put fear back into the hearts of investors.