A Shift in Sentiment as Investors Jump the Fence and Join the Bear Party
Two important investor surveys show a distinct shift in sentiment. Does this mean Thursday’s rally was the start of something bigger?
You've reached your free article limit
You've read 0 of 1 free Pro articles.
If you look at the fact that the S&P cranked up 85 points on Thursday, you’d think everything is right with the world (market) again. But under the hood, you’d think, not so fast.
Just to put this in perspective. Tuesday, the S&P lost 34 points, and net breadth was -934. Thursday’s gain of 85 points gave us a net breadth of +829. So if we just add up those two days, we have the S&P up 50 points with net breadth basically losing one hundred issues. I can tell you that is not the way I envisioned an oversold rally.
Yet the change in sentiment I have been asking for is taking place. Yesterday I explained about the bulls and bears as neighbors, shuffling back and forth across the fence in the backyard. Twenty-four hours ago, I was sensing a shift; I sensed that the bulls had moseyed to the fence, some had jumped over to the bears’ yard.
Then on Thursday morning, we got the American Association of Individual Investors’ weekly poll, and boy, did those folks jump the fence. Heck, they didn’t even mosey over; they took a running leap like they were doing the hurdles at the Olympics.
The bulls fell ten points to 28.8%. This is the lowest reading in a year. That means the bulls didn’t even get this low in the spring. The bears were even more eager to jump the fence as they grew to 53.3%. That is the highest reading since the Tariff Tantrum.
Typically, I scoff at the AAII readings because, as you can see, they not only jump around like day traders, they can also tend to be rather dramatic. However, in this case, the voting for this survey goes through Wednesday evening, which means it is the ‘freshest’ read we got on sentiment after the Fed meeting. That having been said, I like it when there is another indicator that confirms what these day traders believe.
For that, we have the National Association of Active Investment Managers (NAAIM). These folks were on margin four weeks ago. As a reminder, four weeks ago, everyone was talking about broadening out. Then we not only stopped broadening, we contracted and the small caps lost seven percent.
Now they have pulled in their horns so much, with their exposure to the market at 72. This is the lowest since the spring when they pulled it in to 60. I would not call this extreme, but I call this a major change in sentiment.
So now we have an oversold rally with some change in sentiment. In a perfect world, we’d see that crummy rally from Thursday come back down for a few days, perhaps even picking up a few more bears. Or perhaps seeing folks buying some puts—Thursday put/call ratio was .90, so it’s not as though there was a great embracing of the rally. Some more put buying ought to lift the ten-day moving average of the put/call ratio.
So we’re oversold with a nice change in sentiment. Did we get panic? We did not. We didn’t even get extreme bearishness. However, even if we pull back for a few days, we ought to be able to rally again.
