What Investor Uncertainty Could Mean for the S&P 500

Short-term underperformance may lie ahead, but there's hope

Senior Quantitative Analyst
Sep 14, 2022 at 7:54 AM
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The Investors Intelligence (II) weekly sentiment survey is indicating uncertainty in stocks right now. The survey is a collection of more than 100 market newsletters, which editors at II use to determine their stance on the market. I normally focus on the percentage of these newsletters that are considered either bullish or bearish. However, there's a third designation of newsletters expecting a correction (short-term bearish, but longer-term bullish), which aren’t taking a hard stance.

The last survey showed the percentage of these newsletters to be higher than the other two designations, which is a rare occurrence. Since 1972, this has only been the case 4.4% of the time, and just 3.6% of the time since 2000.

This implies an extreme amount of uncertainty at the moment. Below, I will be looking at instances when the correction camp of the II sentiment survey topped these bullish and bearish categories, and how stocks performed going forward.

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When Uncertainty Grips the II Survey

The tables below summarize S&P 500 Index (SPX) returns going back to 1972, based on which designation topped the II sentiment survey. The first table shows data for the current situation, when the correction camp represents the biggest percentage. Stocks tended to underperform in the next four weeks, with the SPX averaging a gain of 0.39%.

Compare that to an average gain of 0.58% when bulls were most popular, and 1.1% when bears were most popular. The underperformance is short-lived, though, when you look at the data six months later. The SPX gained an average of 4.6% when we’re in our current situation. When bulls topped the list, the index averaged a 3.87% return, and it averaged a 6% return when bears topped the list.

In simpler terms, when the correction camp topped the II sentiment survey, stocks tended to underperform in the short-term (four weeks later). But eight weeks and later, there was no underperformance. Interestingly, the standard deviation of returns over the longer term was the lowest when the correction camp topped the list. So when the poll showed the most uncertainty, there was the least amount of volatility over the longer term, as measured by the standard deviation of returns.

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Doing this same analysis with data going back to 2000 gives us some hope. Before then, the II survey proved to be a reliable contrarian indicator, meaning the stock market performed worse when bulls were the highest designation, compared to when the bears were the highest designation. That was true for each time frame, but it changes when you look only at the last two decades.

Since 2000, when uncertainty has been the highest (the correction camp was most popular), that was the best time to be in stocks measured by the average return eight weeks to six months later. The other metrics -- median and percent positive -- were also superior when compared to either the bullish or bearish designations leading the poll. Hopefully, this tendency holds true.

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