Key Takeaway: Optimism wanes, and pessimism builds as the II bull-bear spread narrowed last week to just 1.2%, down more than 4% from the previous week. That brings the spread to its smallest difference since early April 2020. But it’s not until bears outnumber the bulls that we reach levels associated with significant market bottoms. Nevertheless, a surge in pessimism could become reality with active equity managers continuing to reduce exposure, consensus bulls dropping, and major equity indexes testing their respective January lows. Whether sentiment has completely unwound or is still in the process of unwinding is yet to be determined.
Sentiment Report Chart of the Week: Unwound or Unwinding
The NASDAQ is getting plenty of attention for the carnage that is occurring beneath the surface. The stat that really sticks out for me is that 95% of the trading days over the past three months have seen more new lows than new highs. That weakness is now hitting the index and while the NASDAQ 100 is making new YTD lows it’s still more than twice as high as it was at the start of 2019. So while we are seeing evidence of fear and pessimism in the sentiment data, the question I wrestle with from a price perspective is whether we have unwound or are still unwinding. If it’s the former, we should soon find support and start seeing more new highs than new lows. If it’s the latter (which is the direction I am leaning), then there is room for pessimism to continue to rise and the NASDAQ 100 could soon be in the red on a year-over-year basis.
