Sentiment No Longer a Headwind

May 6, 2024

It's amazing what price action can do to change sentiment.

We went from frothy optimism just a couple of months ago, to a much more pessimistic environment for investors.

This table below is a great summary of the different gauges we look at to measure sentiment and what they've done over the past month.

The blue diamonds are the current readings and the gray triangles represent where these were a month ago.

Notice how the Investors Intelligence bull/bear spread, for example, went from newsletter writers telling investors to buy stocks at the highest rate in years, to a complete reversal and a much more pessimistic view of the markets.

These newsletter writers were also telling investors to sell stocks in the Summer and Fall of 2022, during one of the greatest buying opportunities in American history.

The idea here is to measure the extremes in sentiment readings.

Currently, we're nowhere near any extremes, which is much different than where things were just a couple of months ago.

The readings are back towards the middle.

Here is our Sentiment Composite that takes all of these different measures and puts them together into one chart, showing whether sentiment is a headwind (risk due to too much optimism) or if sentiment is a tailwind (opportunity driven by too much pessimism).

Not only is our Sentiment Composite no longer in the "Risk" part of the range, but it's actually quickly approaching the "Opportunity" zone:

Boy that was fast.

It's not perfect, but it certainly gives us a good view of what investors are thinking right now.

Sentiment is hard to measure.

There is no one magic indicator that can tell you when sentiment is at an extreme. And even if you did have one, the timing is still very difficult as sentiment can stay (and has stayed) at an extreme for long periods of time.

So what we like to do is figure out whether Sentiment is a potential tailwind, like most of last year, or if Sentiment is a potential headwind, like it was last quarter.

There's also this big range near the middle where sentiment is neither a headwind or a tailwind. And that's where we are now.

The biggest takeaway for me here is that sentiment is NO LONGER the headwind that it was last quarter.

Remember that in Election years with an incumbent president, stocks tend to start improving in May preparing for a strong summer.

It doesn't have to play out that way this year. But I think it's important to put sentiment and seasonal trends into context while identifying trends across stocks and other asset classes.

We discussed everything last week in our LIVE Monthly Charts Strategy Session.

Premium Members make sure to check out the replay here and download all the slides.