- Investors seem to have little faith in the recent stock market rally, according to recent readings of sentiment indicators.
- With the S&P 500 within 1% of a record high, investor sentiment remains depressed.
- Typically, sentiment follows price, with “greed” readings found near market peaks and “fear” readings found near market bottoms.
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The S&P 500 is trading within 1% of a record high, but investors remain skeptical of the rally in stocks according to several market sentiment indicators.
Typically, investor sentiment follows price, with readings of “greed” or “euphoria” found near market peaks, and readings of “fear” found near the bottom of a market sell-off. This dynamic is why the indicators are considered contrarian, as it often pays to take the opposite view of the sentiment readings.
The readings of “fear” with the stock market near record highs suggests that there is further upside ahead for equities, as the market continues to climb a wall of worry and win over unconvinced investors.
Sentiment indicators that have exhibited signs of cautious investors include the CNN Fear & Greed Index, the Bank of America Bull/Bear indicator, and the AAII Investor Sentiment Survey.
The CNN Fear & Greed Index remains below 50, in the “fear” zone. The index closed at 36 on Thursday, and was only slightly higher at 41 as of Friday morning. The index had an “extreme greed” reading of 99 in January 2020, just prior to the fastest bear market in history, and hit an “extreme fear” reading of 1 in March 2020, right around the pandemic bottom.
Meanwhile, the BofA Bull/Bear indicator fell over the past week to a reading of 6.8 from 6.9. A contrarian “sell” reading is generated once the indicator crosses 8, suggesting there is plenty of room left for investors to get bullish on the stock market.
Finally, bullish readings from the AAII Investor Sentiment Survey fell to 36.4% this week, representing a seven month low. The most recent survey also showed an increase in both bearish and neutral sentiment. The historical average for bullish readings in the AAII survey is 38%.
Investors do have plenty to worry about when it comes to stocks. Higher interest rates, rising inflation, and a potential increase in tax rates are all overhangs for the market, and uncertainty regarding the spill over effect into stocks from the recent cryptocurrency meltdown could also be weighing on investors.
But historically, when investors have been this bearish on the market when stocks have traded near all-time highs, it’s usually been a solid contrarian buy indicator.
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