More Debate on Investor Sentiment

There is a debate brewing today on Street Insight about the rising level of margin debt, and if this is an indicator of rising bullishness.

I would argue that the buildup in margin debt likely has more to do the huge number of newly minted hedge funds that have been created. Since these guys all like to run balanced books, the use of margin debt has risen. But I don't think it is similar to 2000 when there were tons of daytraders that were leveraged long to the market.

Also, the AAII figures came out today, and guess what? Once again, bears (42.5%) outnumber bulls (39.1%). The percentage of bears has now been equal or greater than that of the bulls for 4 of the last 5 weeks. This is a surprising show of bearishness considering the DJIA has been making all-time highs, and the SPX has been hitting yearly highs.

Additionally, the Blogger Sentiment poll conducted by Birinyi Associates has had bears equal to outnumbering bulls for 9 consecutive weeks. This is another surprising sentiment datapoint. Sentiment is less bearish than it was back in July, but it is still not at levels that I would deem outright bullish.

I continue to believe that the market will continue to stairstep higher until more of this bearish sentiment is unwound. I believe it is more likely that we will see a large short-covering rally in 2007 as opposed to a big swoon as a result of too much complacency.