Why Too Much Market Optimism Might Not Be Good

Market sentiment has finally begun to turn around with optimism on the rise. However, some experts are viewing this as bad news for the current bull market.

Market sentiment has finally begun to turn around now that the financial crisis is far in the rearview and investors are finally showing signs of optimism. After 5 years of a rip-roaring bull market, optimism in the stock market and in the economy is finally on the rise.

The question facing the experts is whether this bull market has seen its run and we are now headed for another downturn, or if it is time to hold steady for investors and financial advisors alike.

Ari Wald, head of technical analysis at Oppenheimer & Co., told Yahoo that sometimes being too optimistic about the direction of the market can be bad for the average investor looking to put more money in his or her accounts.

“Typically, when there’s too many bulls in the market the market tends to be due for a setback,” he noted.

Citing a survey that found bullish investors outnumber bearish ones 4 to 1, Wald said there could be another drop coming. He added that investors want to buy into the market when there are not a lot of bulls.

“So the fact that there’s 4 times as many bulls is bearish,” he said.

Fisher Investments said in a release that optimism is not always a bad thing, but there are definitely risks that come with putting too much faith and money in an upward swing.

“It is true folks have a history of flocking to stocks near market peaks. But peaks aren’t the only time retail investors buy,” they noted. “Not all new buying is evidence of heat chasing at the peak without regard for the likelihood of a downturn. Some of it is a simple reversal of the deep pessimism of a bull’s early stages, when folks who got battered during the bear swear they’ll never own a stock again.”

The company said it is a warning sign that optimism in stocks is growing to a state of “gung-ho-stocks-can’t-lose euphoria.”

Concerns about the state of the economy abound abroad as well. International Monetary Fund Managing Director Christine Lagarde recently said in a speech that there were too many factors currently working against the market to be too optimistic, according to a BBC story.

“Confidence is improving and financial markets are upbeat, perhaps a little too upbeat,” the BBC reported her saying.

The issues of high levels of unemployment and significant amounts of debt in many countries will need to be resolved further before true bullishness can be embraced, Lagarde said.