In its most recent survey, the American Association of Individual Investors (AAII) noted that the percentage of investors who are currently bearish is now less than 20%. That's the lowest reading in 18 months, yet as legendary fund manager Sir John Templeton once noted, "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."
I've already researched one half of that maxim. Back in 2010, I noted that stocks tend to rally when that AAII survey finds few bullish investors. The logic is quite simple: When investors are in a negative mood, they have already pushed stocks down to levels that are too low to ignore. As Templeton notes, maximum optimism should be of equal concern.
Margin Concerns
There's an unusual stock market correlation that has developed over the past 15 years that investors should heed. In 2000 and 2007, the amount of money that investors had borrowed to buy stocks (that is, margin debt) surpassed $350 billion. In both cases, the stock market was sharply lower a year later, partially induced by forced margin selling -- and more importantly, the U.S. economy had slipped into recession by then. It's as if investors became overly aggressive with margin debt right at a time when they should have been tilting toward caution.
Well, for the third time in 15 years, margin debt has again moved above $350 billion. The figure has stayed constantly above that threshold for the whole year. (Data are only available through May, which saw a modest downtick, likely induced by "tapering" comments by the Federal Reserve on May 21, though the trend may have been reversed as those tapering comments have subsequently been walked back. The next data will be released in late July.)
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