Key Takeaway: Renewed selling pressure brings an air of disappointment rather than fear. Lackluster price action, an absence of a meaningful breadth thrust, and an overall risk-off environment leave little to spark an optimistic outlook. We’ve seen bears from a survey perspective, and that has created the conditions for a rally. Now, we need to see an increase in bulls if a rally is to materialize into a bull market. Without a rebound in price it’s hard for bulls to get excited and a v-shaped recovery in optimism (like we saw in 2019 and 2020) becomes less likely.
Sentiment Report Chart of the Week: Reversing From An Extreme
Sentiment is not always best used as a contrarian indicator. The way I learned it was to “go with the crowd until it reverses at an extreme.” In other words, when moving away from extremes go with the crowd. Our sentiment composite shows that pessimism has peaked at excessive levels and that represents an opportunity for investors. Now we need confirmation of this reversal in the form of increased optimism. The not-insignificant risk is that price volatility and elevated exposure to equities could lead to further unwinding and keep pessimism elevated for some time (2015/16 come to mind). In that case the bullish impact of a sentiment reversal could be muted.
