Unsure of Market Direction? Try These Sentiment Indicators

Subscribers to our Substack, The Contrarian Edge, received this commentary on Sunday, May 17.

Digging through the crates in Schaeffer’s backroom recently, I came across a relic of a lost age. A magazine, I think folks called it? It didn’t have an internet connection, it was on glossy, high-quality paper (microplastics galore), and there were no video capabilities. An ode to simpler times.

Hopefully, some readers here remember Schaeffer’s monthly print magazine, Sentiment. The nostalgic discovery felt serendipitous, because stock market outlooks right now are as murky as ever. Major indexes are vying for record highs, semiconductors are partying like its 1999, yet inflation data and geopolitical tensions are ever-present.

We’re going to lean into the nostalgia and celebrate Sentiment with a whiparound look of our most valued sentiment metrics.

The self-appointed C.A.I.V.O.S. index is an amalgamation of sentiment indicators from across Wall Street. They consist of CNN’s Fear & Greed Index, the American Association of Institutional Investors (AAII), the Investors Intelligence (II) poll, the Cboe Volatility Index (VIX), index option activity, and short interest. While the acronym needs workshopping, this collection of indicators paints as full a picture as possible of investor sentiment on Wall Street.

Greed has been good; all honor to Gordon Gecko. It’s notable that this has been a pretty consistent churn since April, and just how stark that rise was to start the spring. Sharp sudden moves like that are always scary, though.

 

The latest AAI reading shows the percentile rank of bears is 65% all time. For bulls, its 54%. All things considered, nothing too drastic on the sentiment front.

 

The percentage of bulls among advisors fell to 47.3% (2.7% decrease). The percentage of bears among advisors increased to 23.6% (2.5% increase). 29.1% of advisors foresee a correction in the market.

Bulls, bears, AND the bulls-bears line are all at their long-term average. Similar to AAII, there’s nothing too extreme here to make note of.

 

Wall Street’s “fear gauge” has spent over a month (April 8) below 20. Prior to that, the VIX spent a month above 20. I linked up with Senior Quantitative Analyst Rocky White for some data on this.

 

 

He looked at times the VIX’s 20-day average was above 20 for at least a month (21 trading days) and then the 20-day average moved below 20.

Doing this gives 21 prior signals, starting at 1997. The S&P 500 Index (SPX) underperformed significantly after these occurrences. Six months after, the SPX averaged a return of 0.42% and 62% positive, compared to the usual 4.43% and 72% positive.

The VIX tends to move higher after signals, unsurprisingly.

What about when the SPX is near all-time highs? Yeah, still scary.