Market sentiment readings suggest investors are apprehensive even as the S&P 500 nears a top
- Investors appear to have little confidence in the recent rally in equity markets, according to recent readings of sentiment indicators.
- With the S&P 500 below 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 lows.
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The S&P 500 is trading below 1% of a record high, but investors remain skeptical about a rally in stocks according to several market confidence indicators.
Typically, investor sentiment follows price, with “greed” or “euphoria” readings found near market peaks, and “fear” readings found near the bottom of a market sell-off. This dynamic is the reason indicators are seen as contrarian, as it is often advantageous to take the opposite view of sentiment readings.
“Fear” readings with the stock market near record highs suggest that there is still some upside ahead for stocks, as the market continues to climb a wall of worry and convince unconvinced investors.
Sentiment indicators that have shown 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 Index of Fear and Greed remains below 50, in the “fear” zone. The index closed at 36 on Thursday and was only slightly higher at 41 on Friday morning. The index had an ‘extreme greed’ reading of 99 in January 2020, just ahead of the fastest bearish market in history, and hit an ‘extreme fear’ reading of 1 in March 2020, just around the bottom. of the pandemic.
Meanwhile, the BofA Bull / Bear indicator fell last week to 6.8 from 6.9. A contrarian reading of “sell” is generated once the indicator crosses 8, suggesting that there is still plenty of room for investors to become bullish on the stock market.
Finally, the bullish readings of 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 of bullish readings from the AAII survey is 38%.
Investors have a lot 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 about the fallout on equities from the recent cryptocurrency merger could. also weigh on investors.
But historically, when investors have been so bearish in the market as stocks have traded near all-time highs, this has generally been a strong indicator of buying against the tide.