Are Investors Bullish Or Bearish?

Investor Sentiment Is An Enigma

Sentiment usually isn’t a source of controversy, but it appears there is a lot of disagreement. That might be because of bias, because indicators differ, or because the market has moved wildly. The sentiment is likely bearish only in the short term. Right now, retail traders are too bullish and billionaires are too bearish. This is a convoluted subject. 

Some bears believe sentiment is euphoric because they believe anytime the stock market isn’t down 30% or more, sentiment is too bullish. It’s fair to judge sentiment-based off the fundamentals.

For example, when a stock doesn’t decline on bad news, that’s very bullish. It was a bullish sign when the energy stocks didn’t fall when oil was negative. On the other hand, you can argue that everyone knew negative oil prices wouldn’t stay negative. 

Prices for contracts further out that oil companies actually sell at weren’t as low. Furthermore, the stock market had been strong lifting energy stocks. Even still, many believe the negativity on energy was very extreme, yet the sector wasn’t falling. It has likely already bottomed.

AAII Survey Shows Bears Are Everywhere

AAII investor survey showed investors are bearish again much to the chagrin of the bears. Bears feel sentiment must be positive because stocks have done so well in the past 1.5 months. However, because so many people fear a second virus wave or overvaluation, they are bearish. 

It’s interesting that the high PE ratio has sunk into the consciousness of almost all investors. Fact that so many people fear overvaluation should limit stock appreciation, but it also signals we aren’t in a bubble. This isn’t the 2nd most overvalued market ever.

AAII sentiment index showed the percentage of bears fell 2 points to 50.6%. That’s 20.1% above average. It has been above 50% for 6 of the past 10 weeks. A strong rally met with high skepticism is usually how bull markets start. All bets are off if COVID-19 comes back in the fall, but as for now the market has laid a strong foundation. 

We may continue to see a sideways market until the traders who want to take profits following the strong run are out of their positions. The percentage of bulls also fell as it was down 0.4% to 23.3% which is 14.7% below average.

Almost Hit Euphoria

CNN fear and greed index fell 1 point to 38 which is fear. It agrees with the AAII sentiment index despite the significant rally off the March 23rd bottom. Citi Panic Euphoria model somewhat disagrees poining out that the index was near euphoria at the recent top. A decline this week probably prevented it from hitting euphoria. 

Investors thought there were many bargains on Wednesday and Thursday morning. The chart shows when investors become euphoric, negative 1-year returns follow. It's surprising that the panic this year didn’t get below the panic in 2016. It’s arguable this index did a bad job of predicting how oversold the market was. But it still showed panic which is a buy signal.

Retail Trading Is Still Exploding

One of the most popular stats to share on financial Twitter right now is the increased prevalence of retail traders. As you can see from the table below, E*Trade DARTs were up 232% in April as compared to last year. DARTs are daily active revenue traders. There has been a huge spike in signups on Robinhood and other discount brokers like E*Trade. 

Many bears use these data points as fodder for their stance. They say it’s like the 1990s when everyone was buying technology stocks. However, I disagree. Personally, I think there is a certain group of people who has extra disposable income because they aren’t spending money going out, yet are making the same amount of money from home. 

There aren’t any sports to bet on. This is mostly men who are bored buying stocks that have fallen a lot. It’s tough to call for a bubble after traders buy the dip since the crash has already happened. If the most vicious crash in market history won’t stop people from buying the dip, nothing will. Fact that there are people who can buy the dip shows you not everyone was fully invested before COVID-19 came about.

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Never 3 Day Losing Streak

There hasn’t been a 3-day losing streak since March 9th. It looked like stocks were about to end that streak in the morning as stocks plummeted. However, a reversal kept the streak going. S&P 500 closed up 1.15%. It was up 3.05% from the bottom in the morning. Many of the stocks hardest hit by COVID-19 fell sharply in the morning.

This was the 6th time the S&P 500 closed up at least 1% after being down at least 1% since October 2015. It was the largest intraday reversal since December 2018. Obviously, December 2018 was when stocks bottomed following a mini bear run. The table and chart below show the times the S&P 500 reversed a greater than 1.75% loss for a greater than 0.75% gain since 1962. 

And the table gives the future returns stocks had after those thresholds were met. In the following month, stocks were up a median of 3.1% with a 65% chance of positive returns.

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Very Quick Recovery

We already know this was one of the fastest recoveries ever. Obviously, you can argue it’s not complete until a new high is hit. The chart below supports the argument that this was a fast recovery. It shows the decline in the VIX after big spikes in bear markets. 

As you can see, the VIX fell below 30 faster than after the 2011 European debt crisis and after the financial crisis. Some investors may have predicted the VIX would fall too early. But we did get it right that the VIX would fall quickly. Some argued that the VIX falling below 30 meant the bear market was over. Let’s see if we retest the bear market lows, proving that prediction incorrect.

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