Whether you want to join the crowd or bet against it, you have one tough question ahead of you: Is the stock market looking bullish or bearish?
To be sure, this question is always hanging in the air. But it has become a lot louder in recent days, as the S&P 500 flirts with five-year highs and sentiment indicators point to rising enthusiasm among small investors.
Last Friday's report from EPFR showed an enthusiastic charge into equity mutual funds and exchange-traded funds. Over a one-week period ended last Wednesday, investors bought a net $22-billion (U.S.), marking the second-biggest inflow for data going back to 1996.
The biggest inflow? That would be in 2007, a mere month before the S&P 500 hit a record high.
Does this late-innings interest signal too much enthusiasm for stocks, priming the market for disappointment? Or does it suggest that, at last, money is beginning to flow from the sidelines following a long period of investor skepticism?
Barry Ritholtz sounds worried: "I am more concerned that following a four-year 108 per cent bull cycle in equities, and a year of double-digit gains, the public suddenly rediscovers stocks," he said on his blog, The Big Picture.
Cam Hui at Humble Student of the Markets sympathizes with the contrarian impulse here – especially after adding in the latest survey from the American Association of Individual Investors, showing a jump in bullish views, and the observation from David Rosenberg of Gluskin Sheff that "almost everyone I talk to [in the United States] is now bullish."
Yet, Mr. Hui suspects that the bearish signal is too strong to be useful: "The sentiment picture seems just a little too neatly packaged to me and it would be just a little too easy to be overly bearish here. Positive flows into equity funds after a long winter of negative flows could be interpreted as positively as the return of bullish momentum."
In other words, things are so bullish that they're clearly bearish, which might be bullish. It's enough to make your head hurt. His solution: Expect more upside, but keep an eye on the exits.
Ed Yardeni, of Yardeni Research, agrees: "The end of the bull market might be nearing if individual investors are finally starting to scramble to ride the charging bull," he said in a note. "If so, then there is likely to be lots more upside, though it could all happen in a shorter period of time than anyone imagined."
Meanwhile, the valuation picture is mixed. Savita Subramanian, equity and quant strategist at Bank of America, has taken a look at the relative valuation of the S&P 500, using data going back to 1986.
Overall, the index looks attractive: On price-to-book, price-to-operating cash flow and forward price-to-earnings, the S&P 500 is below its average. That implies gains ranging from 11 per cent to 32 per cent, which is very bullish.
But her enthusiasm comes with some caveats relating to specific groups. Health-care and technology stocks look the most attractive, based on relative valuations. Consumer discretionary stocks, telecom stocks and utilities look primed for a retreat.
At pivotal moments for the market – say, the tech-bubble high in 2000 or the financial crisis low in 2009 – getting the direction of the market right has fed big returns in a very short time period.
Many investors believe that we are at another pivotal moment today. However, the debate is over whether stocks are about to pivot up or down. And the debate is growing more urgent.
David Berman