Conflicting Signals Within Sentiment Reveal What's Happening With Stocks
If you want a clear picture of investor sentiment, you've got to look at more than one indicator.
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I have spent much time these last few weeks ignoring sentiment and focusing on the chop and volatility we have in the market, so let’s take a look at sentiment because, to be honest, it is all over the map.
On Wednesday, we saw the Investors Intelligence bulls notch up two points to 49.2%, so they are not quite at 50% (my expectation was they would get there a week ago), but they are close. The bears stay steady at 30%. Call that leaning high (bullish) but not over the top, not extreme.
On Thursday, we got to see what the day traders at the American Association of Individual Investors are thinking. As a reminder, I think this survey has many flaws, namely that the respondents are not constant each week, they are old (I can say that because I, too, am old!), and the sample size tends to be quite small. For the life of me, I cannot figure out why folks who call themselves pros view this as the holy grail of sentiment.
Be that as it may, these folks got quite bearish this week. The bulls sunk to 33.3%, which is down 8 points from last week. The bears jumped to 42.9% (up 9 points from last week) and the highest since the fall of 2023. That’s quite a change.
The bulls at 33.3% are pretty much within the range. The bears are the ones who seem to be getting more aggressive in their views. Even though I dislike this survey, I have to put that reading on the positive side of the ledger.
But wait, there’s more. The National Association of Active Investment Managers (NAAIM) who have been so steady for the most part, only pulling in their exposure when things got quite dicey. Yet in the last few months, they have gone from just shy of 100 (mid-December) to 64 in early January.
Then we rallied in mid-January and they scooted right up to 86, then the AI scare came, and down they went to 68. Now they are back at 84. It’s as if they too have become day traders. Or maybe, just maybe, they are getting chopped to death in this volatile chop fest.
The options folks are still buying calls, although that, too, has slowed a touch. Earlier this week I noted how the ISE equity call/put ratio was under 2.0 for three straight days, something we hadn’t seen since prior to the election.
The 21-day moving average of the total ISE call/put ratio has backed off quite a bit. It is by no means in what I would call bullish territory but you can see as all that speculation moved from crypto garbage to quantum and so on leaked out of the market so too did the enthusiasm for calls. It is still high, but the big extreme has come off the boil.
I think the back and forth of the market has chewed people up so much that folks don’t know if they should be bullish or bearish. And that is where we stand on sentiment: mixed.
