Mysterious Ways: Bullish Sentiment Grows, With Positive Offsets

With less than two months left in what has been an extraordinary (and mystifying) year on multiple fronts, stocks have maintained a largely uninterrupted trek higher (at the index level) in the face of myriad headwinds—not least being the mid-year surge in the delta variant, supply chain disruptions on a global scale, surging energy prices, and an uncomfortable spike in inflation. While that laundry list of concerns ultimately led to the S&P 500’s 5.2% drawdown in September (the largest since November 2020), the drop was quickly erased in 13 days, as investors embraced the weakness and preserved confidence.

That unwavering conviction in risk assets has brought with it a sharp resurgence in stretched sentiment. Across several metrics—both attitudinal and behavioral—complacency looks to again be settling in. While not every indicator is flashing red, a handful have returned to zones in which they found themselves earlier this year, when euphoria was permeating multiple segments of the market.

Say what?

Starting in perhaps a relatively benign area, we’ll first look at attitudinal measures of sentiment—what investors are saying and thinking. Shown below is the AAII Investor Sentiment Survey, which simply asks respondents if they’re feeling bullish or bearish (illustrated by the blue and yellow lines). Over the past few weeks, there has been a sharp increase in bullishness, accompanied by an equally swift decrease in bearishness. For now, the good news is that the spread between the camps isn’t matching the massive divergence in April this year; and even at that time, the peak in confidence didn’t precede any major weakness for stocks.

Bears moving towards hibernation

An uptick in bullishness can also be seen in the Investors Intelligence (II) Advisors Sentiment survey, which assesses more than a hundred investing newsletters to gauge authors’ views on the stock market. As shown below, bullish sentiment has increased sharply, but not yet to euphoric levels. Interestingly, both lines started to converge heading into October, consistent with prior major declines in the stock market (though not as sharp); yet that dip didn’t turn into a more severe correction.

Still some bears in the II crowd