Key Points

  • After a torturous period of flirtation, the Dow finally crosses 20k
  • Individual sentiment has become less bullish, while other measures show highly elevated optimism
  • Today’s extremely low volatility isn’t likely to persist, but the bull market is

The Dow's flirtation with 20k went on for weeks, with the financial networks breathlessly reporting on every tick as it approached the milestone—subjecting them to much lighthearted ridicule on Twitter and the like. Then came last Wednesday when it finally broke through—somewhat quietly, given that it happened right at the market’s open. I've never been one to put much emphasis on round number milestones for any of the indexes, and have been pleased that it hasn't appeared that our investors have been making decisions based on that level being surpassed.

But perhaps we're being too hasty writing it off as a non-event. We've spilled much ink on the lack of retail investor enthusiasm which has accompanied this entire near-eight year bull market. Perhaps the attention around Dow 20k might wake some investors up from their slumber atop low-yielding cash.

Dow 10k redux?

According to Ned Davis Research (NDR), this was one of the longest stretches for the Dow to break a round number (and remember, as the numbers get higher, the percentage spread between them is lower and therefore easier to exceed). The Dow took 29 days to climb the last 1% to 20k—the ninth longest period for round numbers and the longest since Dow 4k in February 1995. Once the Dow broke through round numbers historically, it tended to outperform its long-term averages for up to a year later.

The threshold has brought comparisons to the first time the Dow crossed 10k in March 1999. We now know that the market was less than a year from its secular peak in 2000.As noted by NDR, a few data points suggest that Dow 20k does not represent an impending secular peak. First, the Dow was more expensive in 1999 (with a P/E of 25 vs. under 21 today). Second, the market’s breadth (A/D, or advances/declines) had already begun to deteriorate by March 1999.Currently, the NDR All-Cap A/D Line is at a 23-year high. The average stock—and therefore the broad market—is healthier at Dow 20k than at Dow 10k.

Investor sentiment remarkably fickle

Investor sentiment has become more fickle during this bull market—quite a bit more volatile than the market's underlying fundamentals. That said there's no denying that investors quickly became enamored with stocks in the immediate aftermath of the presidential election. But that optimism eased just as quickly recently, based on some measures of investor sentiment—surprising perhaps given the hype surrounding Dow 20k.

Below are a handful of sentiment indexes, with which some readers might be quite familiar. Most telling in terms of how fickle sentiment can be is the American Association of Individual Investors (AAII) survey, seen in the first chart below. With only a brief recent period of consolidation of the market’s sharp prior gains, sentiment came off the boil quite quickly.

AAII Investor Sentiment Survey

Source: American Association of Individual Investors (AAII), FactSet, as of January 27, 2017.

Individual investors are often referred to as the "dumb money" and typically a contrarian indicator (we of course always think of our investors as the smart money). SentimenTrader just did an interesting look at times when individual investor optimism had declined markedly, but when other measures of sentiment remained in elevated optimistic territory. Some of those measures are seen below, including Investors Intelligence Advisors Sentiment (measuring the opinions of newsletter writers), the Conference Board’s measure of consumers' optimism about stocks, and National Association of Active Investment Managers' (NAAIM) index measuring the exposure to stocks by mutual funds and exchange-traded funds.

Individuals vs. "everyone else"

Individual investors have suddenly become much less bullish while "everyone else" is displaying some of the most optimistic views in years. The Conference Board (CB) Stock Market Confidence survey has poked into "excessively optimistic" territory for the first time since 2003. And both Investors Intelligence and NAAIM are at or above thresholds denoting an optimistic extreme.

Investors Intelligence Advisors Sentiment

Source: FactSet, as of January 20, 2017.

Conference Board Consumer Confidence Survey

Source: FactSet, The Conference Board, as of December 31, 2016.

NAAIM Exposure Index

Source: National Association of Active Investment Managers (NAAAIM), as of January 25, 2017. The NAAIM Exposure Index represents the average exposure to US Equity markets reported by its members.