Investor Fear At An Extreme And Stocks Rise

Summary

• Just as investors become fearful of stocks, the equity market experiences a turnaround.
• From an investor sentiment perspective, today's Sentiment Survey report by the American Association of Individual Investors saw bearish sentiment increase to its highest level in more than a year at 42.4%.
• Bearishness is also being expressed by newsletter writers. The ratio of the bullish to bearish advisor sentiment has declined to 1.05.

sankai/iStock via Getty Images

Just as investors become fearful of stocks, the equity market experiences a turnaround. Before today's (12/2/2021) trading the S&P 500 Index was down a little more than 4% from its November 18, 2021 high. Yesterday, the S&P 500 Index closed below its 50-day moving average, an area where the market has recently found support as seen in the below chart.

From an investor sentiment perspective, today's Sentiment Survey report by the American Association of Individual Investors saw bearish sentiment increase to its highest level in more than a year at 42.4%. The other side of the bearish coin is bullishness and it fell to a low 26.7%.

Bearishness is also being expressed by newsletter writers. The ratio of the bullish to bearish advisor sentiment has declined to 1.05. A ratio less than 1.0 indicates there were more newsletter authors with a bearish stance than a bullish one.

The Investor Intelligence Advisors' Sentiment Survey studies over a hundred independent market newsletters and assesses each author’s current stance on the market: bullish, bearish or correction.

Finally, the CNN Business Fear & Greed Index now resides in the extreme fear zone too. The Fear & Greed Index is meaningful in that it incorporates seven various sentiment measures into an overall reading.

Sentiment measures are contrarian ones and with the widespread bearishness being expressed by many investors, today's market bounce is not too surprising.

Bearishness is not at a rock-bottom extreme so more choppiness might be expected. Nonetheless, with business fundamentals remaining favorable, and economic ones as well, equity prices might be setting a path for a year-end rally.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[bigmack2.1]

I think a review of my comment on UVXY protection written on Dec 5th was spot on correct. The protection purchased has paid off handsomely as UVXY was the number one ETF gainer last week up I believe 37%. I have learned the hard way that valuation does matter in the longer term and protection when cheap should be purchased consistent with equity exposure levels in the market and one's risk tolerance. I know people state they are willing to risk 20-25% in the market but personally I worry when declines of greater than 5% occur so I am happy to do a little worse on the upside and shelter my account for sizable declines. I know many people who swore off the markets for good after the 1987 crash and inflation cannot be covered with fixed income to prevent significant dilution of buying power. We have all been forced into stock as there was no alternative except for real estate which many do not have the time nor skills to manage. The VIX is a terrible waste of money until it is not. Raise cash levels to your level of tolerated risk and use some precious metals, commodities such as oil/energy, and some volatility products around Fed meetings and earnings reports in small amounts to hedge for major losses. We all need to be mindful of the Fed and personally I am worried that the ax may drop at the Fed meeting in June if not sooner based on geopolitical events. The US withdrawal of embassy personnel from Ukraine tells me the risk is imminent and the failure of Germany to stand with NATO based on energy dependence to Russia shows why confidence in NATO by the US is misguided. What happens of coordinated challenge to US policy if we see moves by China and Russia along with Iran and N.Korea at or near the same time? Biden is a weak President and he will be challenged. The Fed has become a political tool and no longer acts independently or it would have already started hiking rates and eliminated QE with their taper program. Watch that yield curve between the 2yr/10yr to flatten as growth estimates decline and risk of recession rises. Caution is key so be careful trying to time a bottom in this market.

[bigmack2.1]

We have seen in 3+ weeks an almost total reversal on bullish/bearish sentiment to where bearishness prevails almost 2:1. Has a study been made of past occasions on such reversals and S&P performance 30, 60, 90 days later and correlation to VIX levels during such periods? It would appear to me that current VIX levels and fear gauges of sentiment are signaling we are much closer today to a bottom in the next week or two making for a robust Santa Claus rally as liquidity and year end money flows and pension contributions will rock markets higher in a melt up reversal of downtrend. We may have another week or two of volatility swings leading to gap higher. What is your thought of Jan 21 UVXY 1:2 call ratio spread of 15c/50c to provide sizable return on UVXY contracting toward 15-20 and providing cheap protection for holding long equity common stocks with protection to allow for over 110% run up on UVXY in next 6 weeks if I am wrong?
JMack

[OlderThanDirtDave]

Still looks like the Wall of Worry to me...

When everyone is positive is the time to sell .... :-)

Thank you, sir, for another level-headed article.

[1575]

Nothing is extreme in the current market, the fair value for SPX by
end of 2021: 4325 ~ 4778 ( 4550 +-5%);
and by end of 2022 : 4750 ~5250 ( 5000 +-5%).
Current market is very normal, just most of investors do not understand.

[lockwoodj]

David no one can know the future and I'm commending you on not claiming that you have a special crystal ball on this.

BUT, stating that investor fear is at an extreme is simply not even close to being true. The ETN VXX has gone from a bottom of 20 or 21 to around 26. Extreme fear was clearly expressed in late February and into early March of 2020 when VXX went up almost five fold. This would be equivalent to VXX currently being at around 100.

And you've been at this a long time and know that, if possibly we are in a bear market, large FOMO-inspiring rallies tend to be found in bear markets and less often in bull markets. You've pointed out the nice rally yesterday but that is in no way an indication that markets are headed back up through the end of the year.