Todd Salamone: Market reaches "acceptance" phase, buy the dip

In monitoring various sentiment-based indicators, it appears that we have entered the "acceptance" phase of the bull market. Acceptance has much to do with acknowledgement of an economic recovery. We find this intriguing, as investor bearishness has been due to the perceived "disconnect" between a weak economy and stock market strength.

For those of you new to sentiment analysis, I'll quickly review the various psychological market phases. There are four stages of investor sentiment as we move from a market bottom to a market top. At the bottom, sentiment is characterized by "despair" and an utter lack of hope ("despair stage"). The initial rally off the bottom is simply not believed ("disbelief stage"). Once the rally has been sufficiently lengthy and has come sufficiently far in price, and evidence of an improving economy becomes incontrovertible, it is finally accepted that we are in a bull market ("acceptance phase"). And, ultimately, there comes the flat-out belief that the bull market will last forever ("euphoria phase").

Below, I list recent headline stories that reflect mounting evidence of a move into the "acceptance" phase of this bull market. For the short term, this sudden emergence of optimism could leave the market vulnerable to a mild correction or range-bound behavior in the weeks ahead. That being said, I would be remiss not to mention that the contrarian approach is most useful when sentiment is counter-trend to market performance; that is, for example, when strong market performance is met with disbelief. Instead, what we are currently seeing is growing optimism within the context of a sharply rising market.

• BusinessWeek April 19, 2010 cover story: "The Hot Hand – Obamanomics Is Working Better Than You Think"
• Newsweek April 19, 2010 cover story: "America's Back! The Remarkable Tale of Our Economic Rebound"
• The Economist April 3, 2010 cover story: "Hope at Last"
• The New York Times April 8, 2010 article: "Why So Glum? Numbers Point to a Recovery"
• The Wall Street Journal April 15, 2010 article: "Evidence Mounts of Strong Recovery"

[...]

A marked pullback should be viewed as a buying opportunity, as buyers of this market have been hedged players who are less likely to panic sell on disappointing news.

~ Todd Salamone, "Dow Conquers 11,000, But Goldman Suit Overshadows Week," Schaeffer's Monday Morning Outlook, April 17, 2010