Market sentiment has made a huge reversal. Here’s why and what it means going forward
Something unusual happened in the past few weeks. Ned Davis Research said its Daily Trading Sentiment Composite swung from extreme pessimism to extreme optimism in less than three weeks. Through Monday’s close, the indicator sits at 63.3. A reading above 60 indicates excessive optimism. This swing has also been reflected in the U.S. equity market. The S & P 500 is up more than 1.7% over the past month. On Wednesday, it set fresh intraday and closing records. .SPX YTD mountain SPX year to date Ed Clissold, chief U.S. strategist at Ned Davis Research, highlighted three reasons for the reversal: Retail comeback: Clissold pointed out that the latest American Association of Individual Investors survey showed the highest number of bulls since December of last year. Institutional bullishness: He added that institutional sentiment increased by the most since December 2023. Big VIX drop: Wall Street’s fear gauge, the Cboe Volatility Index , dropped this week to its lowest level in over a year. It last traded around 14, compared to its long-term average around 20. For investors, this is a warning sign that a decline may ensue. NDR pointed out that the S & P 500 averages a 4.93% annualized loss when its sentiment indicators enters excessive optimism territory. To be sure, Clissold notes that: “Major market peaks have often come at much higher readings, often in the upper 70s or 80s compared to the current reading of 63.”
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