Stock market watchers pay attention to investor sentiment because excessive optimism is often followed by mediocre or poor returns. Think of it this way-if everyone is optimistic, who is left to buy stocks? The first chart shows the percentage of investors who say they are optimistic about the stock market. The current reading is literally off the chart!
You might discount this to some extent because it is based on a poll and we know that people often talk the talk without walking the walk. Well, the next chart shows the equity weighting of the average investor-this depicts what they are actually doing with their portfolios. Note that current equity weightings are near all-time highs. This indicator does not provide any guidance regarding short term returns. However, it is a great contrary indicator for seven to ten returns and the current reading suggests annual returns of 1% or so.
I have consistently demonstrated an inability to accurately forecast the direction of the markets so I will refrain from making a prediction other than to say that investors are giddy which is generally a reason to be careful.