When Good News Is Bad News

Sometimes investment managers live in Bizzaro world, the place in the old Superman comics where everything is the opposite of what logic would dictate.

A case in point is the recent investor optimism.  Investors have been returning to the stock market, where inflows are finally exceeding outflows.  The American Association of Individual Investors recently found that 48% of investors are bullish on stocks, the highest level since February 2007, while only 27% are bearish, which is the lowest level since January 2006.

So shouldn’t we all be euphoric that investors are finally following our advice and returning to the market?

Not really.  The en masse return of the individual investor is a sign that stocks are overbought and overpriced, and could be destined for a fall.

There are plenty of other factors to consider – some positive and some negative – but the more confident individual investors become in the market, the less confident investment managers become.

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