Predictably, that has also triggered a rebound in bullish sentiment and helped coax investors back into the market. The American Association of Individual Investors finds 48% of investors surveyed are bullish on stocks as of last week—the highest level since February 2007. Bearish sentiment, at 27%, is at its lowest since January 2006.
For now, this support could help the market extend its recent run. Yet it may also mean it is late in the rally game. Retail investors are usually a lagging indicator, reacting to past performance rather than predicting future gains. Their flows, says Harvard University lecturer Owen Lamont, can create “a short-term lift” but it rarely lasts beyond a few months. He and Andrea Frazzini of AQR Capital Management have written a series of papers together on this “dumb money” phenomenon.
