Charlie: Brexit Impact Short-Lived

07.06.2016 • Politics and War

From The Fleet Street Letter (GREAT BRITAIN)-
The Pound, Sentiment and Brexit
It recently came to my attention that the American Association of Individual Investors
(AAII) Investor Sentiment Survey was showing a reading of extreme bearishness. The AAII carries out a weekly survey and has been asking the same question to its members since 1987: Do you feel the direction of the market over the next six months will be up (bullish), no change (neutral) or down (bearish)? The results give us a clue as to how the crowd feels about the stockmarket. The series is volatile and fickle. It shows you how the crowd can quickly turn from being optimists to pessimists. To lessen that effect, I have smoothed the data in the hope of making some sense of it. Currently, there’s a severe lack of bulls compared to history. Where are all the bulls?
Many believe that the consensus data is something you should trade against. In other
words, if the crowd is bearish, you should be bullish. I did some number crunching on this data. But before you expect some magical outcome, I can say that the results are as noisy as the data itself. However I did draw a couple of conclusions:
  • • It has rarely been wrong to buy the stockmarket when the percentage of bulls has been low. The late 1980s weren’t great, yet the market did rise slowly rather than fall. The mid 1990s was an excellent time to buy (ahead of the tech boom) as was early 2009 (after the credit crisis) and late 2012 (after the Euro crisis). Could this be a buy signal before our eyes?
  • • Before you get excited, it hasn’t been profitable to buy the stockmarket when the majority have sat on the fence. After all, they did in the late 1980s and the outcome was OK – just not great. And then again in the late 1990s (start of the tech collapse). That was a total disaster.
On the one hand, this data is telling us to buy the market – yet on the other, it is suggesting that returns will likely be somewhere between modest and disastrous. That’s unhelpful to say the least. What is clear, is how unclear things have become for most people. Following the economic events we have witnessed in recent years, that’s no great surprise. For Americans, there’s interest rate hikes and Trump to consider. For the Europeans, there’s jobs and immigration. For the British, there’s a referendum just three weeks from now.
Britain must decide whether it stays in or leaves the European Union (EU). Which way will it go?

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