American Association of Individual Investors sentiment survey =20% bulls this week.
Very negative pessimism by investors = positive outlook for the markets going forward.

Six month period leading up to mid cycle elections have on average been down since 1930.

Six month period after mid cycle elections since 1950 have not been down once and have averaged a median gain of 16% and 50% gain to the peak of that year following the election since 1914.

Conclusion = Time to start getting very bullish soon.

See the following:

http://www.nytimes.com/2010/08/23/business/economy/23decline.html?_r=1&hp

http://www.businessinsider.com/yep-investors-have-panicked-for-three-straight-months-2010-8

Numerous articles from the media have been highlighting the sorry state of affairs in the economy, housing markets, and stock markets.

Looking back at history, this should be a time to start getting optimistic.

Nothing has changed in my view, but I always keep an open mind.  This second round of quantitative easy by the Fed should be extremely bullish for equities because it basically forces investors to make a choice between investments paying almost nothing (i.e.,bonds and cash)  and equities.  There’s no doubt that the economy has slowed, but that’s pretty normal in the second year of an economic recovery.  This year is no difference from other second year recoveries over the last 20 years.  I will admit that this time may be different because of the deflationary aspects of the stock market and real estate bubbles bursting over the last decade.  We’ll have to wait and see.

Having said that, it is still my contention that most of the daily activity in the equities’ markets  is about tens of thousands of traders chasing similar chart patterns.  The June top in the S&P500 index just happened to be just about the same level that the index reached over the last six days prior to today.  The June top of 1129-1131 was considered major resistance by most traders.  It was attacked six times over the last week and couldn’t be breached.  It was a perfect reason to sell for many traders which then forces other traders to sell.

Watch how the news will ” magically” change once that level is breached to the upside.

In the meantime, I’m keeping a close eye on the markets.  Market trading can create its own dynamic.  Let’s hope that economic reality and trader psychology eventually mesh.

I’m cautious for now and waiting to see if the magical resistance level from June is eventually broken to the upside.

We’ve had a nice move over the last month and the markets are now approaching overbought levels once again.  If they continue to push higher, it will be an indication that risk taking behaviour is back in vogue despite economic reality.  Remember, the jet fuel for higher equity prices is easy montetary liquidity and all indications coming from the Federal Reserve is that they will keep the spigots open as long as necessary to stave off deflation.  What happens after this long bout of easy money is anyone’s guess.   I’m of the opinion that with all this overwhelming media attention on deflation now, there’s only one way prices can go and that’s higher inflation.

I noticed on my trip to Europe that the airports and planes were filled and I can’t imagine that if we’re in a depression that this would be true.

Bottom line is that we came through a once in a 100 year event in 2008-2009 and it will take some time before the economy gets back to some semblance of normal.

Some positives include what appears to be a bottom in the Chinese market and the strengthening of the Euro. We’ll have to wait and see if these trends have some life to them.

I’ll be away for the next 2 weeks so there will be no commentary while I’m gone.

If they don’t, it will be a warning sign that long-term correlations no longer matter and all bets will be off. We’ll have to wait and see, but assuming the correlation hasn’t disappeared after all these years, I expect markets to follow higher.

Back April 15 at the height of optimism, I said the following:

“Psychological indicators of market optimism (e.g. CBOE equity only put/call option ratios) are at an extreme not seen in a long time and even though this can be bullish over the next few years, they usually indicate that recent market gains will be totally given up soon enough.”

I think this panic bottom is almost over.  Calling it to the day is impossible, but its close.  Oversold indicators are at extremes not seen since November 2008.  When the rebound comes, I believe it will be quite sizable.

http://www.reallibertymedia.com/content/citi-weve-gone-panic-complacency-and-now-were-back-all-way-panic

No one knows the future, but the odds of a market rebound keep getting stronger.

As I keep repeating, buying markets when there’s rampant fear is usually a better long-term winning strategy than buying when everyone’s fat and happy.

Some positive signs include some of the leaders like Caterpillar, IBM, Apple and others having bottomed in May and making higher high prices and higher low prices since even though the indexes are close to the bottom of May.

Whether I’m right remains to be be seen. Keep in mind that the markets are not an all or nothing game. It’s about probabilities and gains are made longer term when you buy at lower prices. the problem for most people is that they’re only comfortable buying when others are buying and that’s at higher prices.