Bye-bye, Bear?

May 28, 2009
Special Feature

Is the recent jump in stock prices a bear market rally, another example of irrational exuberance, or the real thing?

Is the recent jump in stock prices a bear market rally, another example of irrational exuberance, or the real thing? Has the market finally hit bottom and started to recover? Investors remain leery; high-profile financial gurus like Warren Buffett have called market bottoms in the past and have been proven spectacularly wrong. Back in late October of last year and again in November, some market analysts told investors that the worst was over, only to see stocks fall off a cliff in March.

This time it’s different, say the bulls, pointing to some new signals that the stock market may be out of the ICU. One surprising factor of the bullish sentiment is the overall bearishness of the average investor. A survey by the American Association of Individual Investors shows that 70% of retail investors are bearish on the market and only 19% are bullish. That’s the most pessimistic result in the history of the survey, which dates back to 1987. The survey has a good track record of forecasting bull markets, which are usually preceded by a severely bearish outlook among average investors. The theory is that once everyone who wants out of the market has sold, the selling pressure dries up, creating a market updraft.

The bears aren’t giving ground easily. The economic downturn is going to get worse before it gets better, say the pessimists, and housing prices most likely will go even lower. And even if the market has made a bottom, the bears say, investors should be more concerned about preserving capital than missing a recovery rally. If they aren’t, they haven’t learned the lessons of one of the worst bear markets in history.