In Peter Lynch’s famous investing book, One Up on Wall Street, he explains his “cocktail party” theory as it relates to the level of the stock market.
A Summary of Lynch’s theory:
Stage 1: At the party, the markets been down a while and people are not talking about stocks.
Stage 2: Markets are up 15% and people may talk about stocks but they still consider the stock market too risky.
Stage 3: Market is up 30%, people start asking for stock picks from professional money managers. They invest in a couple stocks.
Stage 4: People are extolling their great success in the stock market and start giving everyone advice on what stocks to buy.
I would characterize the people in stage 4 as Cocktail Party Heroes!
There is no doubt that most sentiment indicators are stretched in a negative way. However, it seems that the new market highs have not resulted in bullish feelings by the individual investor. Since 1987, the AAII sentiment survey has measured how individuals feel about the stock market. The latest bullish sentiment reading from AAII came in at 38.5% which is far below the major market tops of the last 30 years.
Bullish Sentiment Readings (AAII Data):
2/23/2017: 38.5% – Current Reading
8/25/1987: 52% – Reading at Market Top
3/24/2000: 65%- Reading at Market Top
10/9/2007: 55% – Reading at Market Top
If you run into any cocktail party heroes, let me know; however, the latest data suggests that we are not at a market top.
As always, American Capital Advisory is still accepting investors into our investment strategies and I would welcome any referrals.