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I’ve been reading Barron’s since I was a kid (sad, I know). These days I skim most of it with one exception. I read Michael Santoli’s column religiously; in my estimation, he’s got to be one of the best financial writers around today.

That being said, his latest column conveniently validates a point I have been belaboring for months: sentiment is just about as negative as it gets and this can only be taken as a bullish sign for the markets.

Santoli writes:

Consider that the University of Michigan’s consumer confidence gauge recently hit depths only registered before in 1980, at the time of double-digit interest rates and a triple-digit Dow. The NFIB’s Small Business Optimism measure has plunged well below any prior low in its 12-year history. (Thanks to the folks at for assembling this data montage.)

These downcast economic views come in the context of a broader public discontent. Fewer than 20% of poll respondents lately have been saying in the country is on the “right track.” The last time the numbers were so low was…never. Similarly, President Bush’s ebb in approval rating this year — 19% — was a new low for any president since the surveys began under FDR….

From a tactical perspective, it’s worth noting that very low consumer- confidence readings — similar to extremes of bearishness among investors — tend to have positive implications for stock performance six months or a year later. We now have the rare condition where typically emotional, volatile and short-term-focused Wall Street has somewhat more equanimity than the stereotypically level-headed Main Street set.

True, some investor-sentiment indicators near recent market lows fleetingly approximated the kind of risk aversion and despair that coincided with market lows in 2002, 1998 and earlier episodes. (One of these, Ned Davis Research’s crowd sentiment poll, is flashing an equivocal, but net-bullish, signal.)

But today the investor mindset is more one of caution than panic, neglect rather than hatred. It seems investors are skeptical and just defensive enough now that downside from here need not be too severe, even if the economic data erode further and/or oil prices recover.

Word up.

The Psychological Recession
Michael Santoli
August 25, 2008

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