Our Biggest Fear: Too Many Bullish Investors

Before you go, we thought you'd like these...
Before you go close icon

The bulls are taking over the market, bringing it ever closer to a three-year high and sentiment measures to 10-year peaks, reports CNBC's Jeff Cox.

So what's the danger? Contrarians will be quick to point out that there is too much bullish sentiment being cashed in, and history has never looked fondly upon such a scenario.

He notes that while there have been some stellar performers, like Apple and Netflix, most companies have just managed to beat "extremely muted expectations." The S&P 500 index is also "nearing a peak around the 1325 mark -- right where it opened Thursday and where it struggled to break through." Historically, the index has had trouble maintaining levels above 1300.

What's more, the 2012 rally has been a low volume one, and the majority of activity has primarily come from overenthusiastic institutional rather than retail investors. "The case is bolstered by a staggering $932 billion flow into checking and savings accounts in 2011, and a modest $1.2 billion flow into stock mutual funds thus far in January."

He says it just adds up to a high-risk environment. So, are these firms setting themselves up for a big disappointment? After all, many of the factors that have caused the economic problems in 2008 through 2011 are just as worrying in 2012. That includes the European debt crisis, housing and high unemployment issues, and the potential for further downgrades from rating companies like S&P.

Will the bears soon be saying, "I told you so?"

Business section: Investing ideas
So we were wondering, which companies have been boosted by extreme bullish sentiment?

To create this list, we started with a universe of about 200 stocks in rally mode -- trading above the 20-day, 50-day, and 200-day moving averages.

To refine the list, we collected data on institutional transactions and identified the names that have seen significant inflows during the current quarter.

And to further refine the list, we collected data on short-seller trends and identified the names that have seen a significant decrease in shares shorted during the current month (i.e., short-sellers think the upside of these stocks outweighs the downside)

Sophisticated investors, like hedge fund managers and short-sellers, think these rallying stocks are going higher -- do you agree? Or is this extreme bullishness a signal for caution?

List sorted by distance from the 200-day SMA. (Click here to access free, interactive tools to analyze these ideas.)

1. DemandTec: Provides collaborative optimization network of software services connecting retailers and consumer products (CP) companies. The stock is currently trading 0.08% above its 20-day SMA, 16.72% above its 50-day SMA, and 49.17% above its 200-day SMA. Net institutional purchases in the current quarter at 2.4M shares, which represents about 7.76% of the company's float of 30.93M shares. Shares shorted have decreased from 1.71M to 1.18M over the last month, a decrease which represents about 1.71% of the company's float of 30.93M shares.

2. Approach Resources (NAS: AREX) : Engages in the acquisition, exploration, development, and production of oil and gas properties in the United States. The stock is currently trading 5.45% above its 20-day SMA, 10.61% above its 50-day SMA, and 35.83% above its 200-day SMA. Net institutional purchases in the current quarter at 3.7M shares, which represents about 14.85% of the company's float of 24.92M shares. Shares shorted have decreased from 5.28M to 4.86M over the last month, a decrease which represents about 1.69% of the company's float of 24.92M shares.

3. Oxford Industries: Engages in designing, sourcing, and marketing apparel products primarily in the United States and the United Kingdom. The stock is currently trading 5.37% above its 20-day SMA, 15.57% above its 50-day SMA, and 30.69% above its 200-day SMA. Net institutional purchases in the current quarter at 752.3K shares, which represents about 5.43% of the company's float of 13.86M shares. Shares shorted have decreased from 1.50M to 1.34M over the last month, a decrease which represents about 1.15% of the company's float of 13.86M shares.

4. Ryland Group: Operates as a home building and mortgage-finance company in the United States. The stock is currently trading 5.70% above its 20-day SMA, 16.94% above its 50-day SMA, and 27.46% above its 200-day SMA. Net institutional purchases in the current quarter at 2.8M shares, which represents about 6.77% of the company's float of 41.36M shares. Shares shorted have decreased from 7.24M to 6.29M over the last month, a decrease which represents about 2.3% of the company's float of 41.36M shares.

5. Clayton Williams Energy (NAS: CWEI) : Engages in the exploration for and production of oil and natural gas primarily in Texas, Louisiana, and New Mexico. The stock is currently trading 8.44% above its 20-day SMA, 12.92% above its 50-day SMA, and 26.70% above its 200-day SMA. Net institutional purchases in the current quarter at 312.3K shares, which represents about 5.26% of the company's float of 5.94M shares. Shares shorted have decreased from 1.12M to 854.38K over the last month, a decrease which represents about 4.47% of the company's float of 5.94M shares.

6. Louisiana-Pacific (NYS: LPX) : Engages in manufacturing and distributing building products for new home construction, repair and remodeling, manufactured housing, and light industrial and commercial construction. The stock is currently trading 4.97% above its 20-day SMA, 14.83% above its 50-day SMA, and 22.42% above its 200-day SMA. Net institutional purchases in the current quarter at 7.9M shares, which represents about 6.39% of the company's float of 123.69M shares. Shares shorted have decreased from 18.03M to 16.74M over the last month, a decrease which represents about 1.04% of the company's float of 123.69M shares.

7. Vulcan Materials (NYS: VMC) : Engages in the production and sale of construction aggregates for the infrastructure industry primarily in the United States. The stock is currently trading 6.67% above its 20-day SMA, 17.60% above its 50-day SMA, and 21.59% above its 200-day SMA. Net institutional purchases in the current quarter at 6.4M shares, which represents about 4.98% of the company's float of 128.64M shares. Shares shorted have decreased from 18.23M to 15.72M over the last month, a decrease which represents about 1.95% of the company's float of 128.64M shares.

8. Lamar Advertising: Provides various outdoor advertising services. The stock is currently trading 4.12% above its 20-day SMA, 15.06% above its 50-day SMA, and 20.46% above its 200-day SMA. Net institutional purchases in the current quarter at 3.4M shares, which represents about 6.92% of the company's float of 49.13M shares. Shares shorted have decreased from 7.01M to 6.36M over the last month, a decrease which represents about 1.32% of the company's float of 49.13M shares

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity, short data from Yahoo! Finance, all other data sourced from Finviz.

At the time this article was published The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Vulcan Materials, Netflix, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners