Bearish sentiment is at one in every of its highest ranges since 2000 regardless of shares’ minor dip from document highs. The Each day Breakdown digs in.
Friday’s TLDR
Sentiment is extremely bearish
Can the market backside?
Bonds discovering a groove
The Backside Line + Each day Breakdown
We’re virtually two months into 2025 and it’s been a bumpy experience. The S&P 500 is about flat on the yr and down about 2% over the previous three months. The sugar excessive we noticed instantly after the election has worn off as shares, client confidence, and sentiment have all come underneath strain.
Talking on that final notice — sentiment — we’ve seen fairly an fascinating improvement. There are a number of sentiment readings on the market, just like the NAAIM, the CNN “Worry & Greed” Index, and the AAII survey. (Be at liberty to bookmark these for the longer term, too).
For as we speak’s dialogue, I’ll be specializing in the bull and bear sentiment surveys from AAII, beginning with the bulls:
Since 2000, the bottom bull studying was 15.8, whereas this week rang in at 19.4. Readings under 20 have a tendency to come back into play close to a trough in sentiment.
On the flip aspect, bearish sentiment tends to spike throughout instances of uncertainty. Discover how prior spikes above 60 occurred close to the depths of the monetary disaster, the lows of the 2022 bear market…and proper now:
Sentiment extremes are likely to act as contrarian indicators. Which means that when we’ve a “washout” in sentiment — the place bullish readings are actually low and bearish readings are actually excessive — shares are likely to type a backside.
(The other could be true on the upside, too. When bullish readings get towards an excessive excessive and bearish readings close to an excessive low, markets are likely to high and pull again).
The fascinating factor right here is, the S&P 500 was about 3% off its all-time excessive when this week’s survey was launched. That’s not one thing we are likely to see when sentiment is that this low.
Making Sense of the Mindless
It’s arduous to say what precisely is driving this response, however a number of issues stick out. First, although 9 of the S&P 500’s 11 sectors are constructive on the yr, the 2 sectors which might be decrease — tech and client discretionary — are main holdings for buyers.
In the event that they’re doing unhealthy, after all sentiment is taking a success.
Second, financial coverage uncertainty is hovering. Within the US, this measure is at its third highest degree since 2000, with solely the monetary disaster and Covid coming in increased. Globally, it’s the best it’s been since Covid…and it’s near surpassing that determine proper now.
The back-and-forth tariff threats are carrying on buyers, even when they’ve been extra bark than chew to this point.
The Backside Line
With sentiment nearing an excessive, control markets to see if shares and crypto can discover their footing. If they will, let’s see what sort of rally develops. If they will’t, it’s attainable that sentiment stays dampened and creates a type of self-fulling prophecy through decrease costs.
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The setup — Bonds
One of the vital-traded bond ETFs is the TLT, which has been in demand in latest buying and selling. The truth is, it’s up about 4.5% up to now this yr and has had some latest pep in its step after breaking out over downtrend resistance.
That mentioned, there’s no sugarcoating it: The TLT has struggled over the long run and is down virtually 2% over the previous yr. Be aware that the TLT remains to be under its 200-day transferring common (in crimson).
As yields have come underneath strain, rate-sensitive belongings like bonds, dividend shares, and REITs have loved latest positive factors.
Some lively buyers might desire a minor pullback first — which is ok — however as long as TLT can keep above the $87 to $88 space, bulls may keep latest momentum. For sustained momentum although, they’ll have to see TLT regain the 200-day transferring common.
On the draw back, a break of $87 to $88 may open up TLT to extra promoting strain.
Choices
For some buyers, choices could possibly be one various to invest on TLT. Keep in mind, the chance for choices consumers is tied to the premium paid for the choice — and dropping the premium is the complete danger.
Bulls can make the most of calls or name spreads to invest on additional upside, whereas bears can use places or put spreads to invest on the positive factors truly fizzling out and TLT rolling over.
For these trying to study extra about choices, think about visiting the eToro Academy.
Disclaimer:
Please notice that as a consequence of market volatility, a few of the costs might have already been reached and situations performed out.
