Investors say they're bullish... but they're selling stocks... which is bullish

Here are two reasons to be bullish on stocks: investors say they are bullish while investors also, on net, sold stocks last week.

In a note out over the weekend, Ari Wald, head of technical analysis at Oppenheimer, pointed out that newsletter writers show investor optimism remains high with the firm’s composite reading of sentiment from these investors currently sitting at 87%, the highest in three years.

The most recent fund flows data shows, however, that stock ETFs and mutual funds last week saw net outflows for the first time since the election, indicating that investor skepticism still exists in the market. But it is this skepticism, however, that should bolster the bulls over the long term.

“While newsletter surveys are signaling optimism, recent fund flow data suggests that investor skepticism still lingers,” Wald writes.

“For instance, ICI estimated a $2B net outflow from domestic equity ETFs and mutual funds for the week of Jan 6, which marks the first redemption since the US election. What investors are doing is often more important than what they’re saying, and we therefore view this lack of euphoria as a positive for the overall equity cycle.” (Emphasis added.)

Source: Oppenheimer

And while Wald is a technical analyst, this view is grounded largely in investor psychology.

Former Fed Chair Alan Greenspan in 1996 used the phrase “irrational exuberance” to ask whether stock markets had gotten too optimistic about future growth. The phrase was later canonized in Robert Shiller’s 2000 book of the same title and now sits in the back of seemingly all investors’ minds when they ask whether or not stock prices have reached unsustainable levels.

And certainly, the post-election rally we saw in stocks made some in markets worry that we moved too far, too fast. The recent consolidation that has seen stocks trade in a very narrow range since mid-December certainly reinforces the idea that we went far, and fast.

But the recent net selling of stocks — which according to Wald’s data was also preceded by two pretty tempered weeks of buying — shows that while money certainly moved enthusiastically into stocks after the election, that excitement has been lacking in actual allocation decisions of late.

Some commentators said after the election we were in the midst of, and perhaps near the beginning of, a secular bull market. And while it may be counterintuitive, investors selling stocks after a big run-up can be a sign affirming a call for long-term bullishness.

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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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