Key Takeaway: In July, consumer expectations for stocks dropped to their lowest level since March 2009.  Excessive optimism is clearly not an issue for stocks right here. But bulls need to be resilient if the market is going to move higher. Recent breadth and momentum thrusts are fodder for optimism, but the persistent downtrend in stocks is dampening rally attempts. The latest numbers from AAII, II and NAAIM suggest questions about bullish resolve are well-founded. All have rolled over and are showing increased caution. If that continues, a broader re-set becomes more likely - one in which positioning (which has been resilient) gets more in line with sentiment.

Sentiment Report Chart of the Week: Expectations For Stocks Have Tanked

Key Takeaway:  It takes bulls to have a bull market. Seeing cyclical sentiment moving from pessimism to neutral in recent weeks has been fuel for the rally off of the June lows. From both a fund flow and survey perspective, investors have been increasing participation since mid-year. But with a robust appetite for Risk On assets still not apparent, the biggest risk from a sentiment perspective is that macro headaches fuel an uptick in pessimism that overwhelms the positive thrust developments of the past few weeks. That could lead to a more complete unwind from a strategic positioning perspective. For now, optimism is on the rise but far from excessive, and that tends to be a sweet spot for stocks.

Sentiment Report Chart of the Week: Households Hold On To Stocks

Key Takeaway: Permabulls will almost always complain about rallies being unloved, just as permabears never leave their refrain that downside risks are under appreciated. That is the prism through which they view the world. In the current situation, complacency is rising and optimism is building, both from low levels. After the buying panic seen in the NAAIM data in July, we saw something similar in this week’s data from Consensus Inc (the largest one-week increase in optimism in over a decade). Even though bears still outnumber bulls on the AAII survey, equity ETF inflows are heating up. The shift from excessive pessimism to increased optimism is the most bullish part of the sentiment curve and that is where we find ourselves. Breadth thrusts and surging momentum are cherries on the top.

Sentiment Report Chart of the Week: Strong Momentum Doesn’t Usually Just Evaporate

Key Takeaway: In recent weeks, the bulls have made their presence known after hiding in the shadows for most of the year. But as they inch their way forward, they will need assurance from the market that they’re moving in the right direction. So far, any signs of positive feedback have been lacking. New lows remain greater than new highs (for 35 weeks and counting). And there is an absence of strength among global markets, although they have stopped going down. The market needs to turn it up in regards to price and participation if the bulls are to prove more than a bunch of wallflowers.

Sentiment Report Chart of the Week: How Do We Keep The Bulls On Dance Floor?

Key Takeaway:  It’s been bears on parade all year, starting with significantly less optimism coming into this year than was seen at the beginning of 2021 or 2020 and continuing through lengthy stretches of more bears than bulls on both the II and AAII surveys. Persistent pessimism among advisory services has now been broken and it’s time for the bulls to show what they’ve got left in their tank. The clock is ticking, though, as they’ve used so much of their limited firepower and yet we continue to see more stocks making new 52-week lows than 52-week highs. Bulls have put together two days of better than nine-to-one upside volume (on July 15 and again on July 19). That checks off one box (out of five) on our bull market re-birth checklist, but there is more work to be done before concluding that any uptick in optimism is well-placed. 

Sentiment Report Chart of the Week: Recession Fears Misplaced?

Key Takeaway: Flow data showing equities attracting 71 cents of every ETF dollar in the first half of 2022 casts some doubt on claims that sentiment is washed out even as bears continue to outnumber bulls. New lows > new highs and excessive pessimism are features of bear markets, while new highs > new lows and building optimism tend to be seen in bull markets. The wall of worry seen in the AAII sentiment data off of the COVID lows is more an exception than it is a rule, especially in the absence of breadth thrusts or other evidence of strong participation. Between the ETF flow data and measures of household asset allocations, the risk is that the investor love affair with equities grows cold and they seek solace elsewhere. Overall the sentiment data now looks more similar to what was seen in Q1 2008 than what was seen at the lows a year later.

Sentiment Report Chart of the Week: Equities Feel The Flow