Despite 20% Rally In S&P 500 In Past 11 Weeks, Investor Sentiment Restrained

Since late December, US stocks have rallied massively. Yet, investor sentiment has not caught up. Reason for bulls to worry or rejoice? The answer may lie in who decisively wins the bull-bear tug of war around 2800 on S&P 500.

US stocks have had quite a comeback.

Intraday between early October and late December last year, the S&P 500 large cap index (2808.48) lost just a tad north of 20 percent. As bears were taking a victory lap, the index bottomed on Boxing Day. Since that low through Wednesday’s high, it rallied just north of 20 percent.

In the process, not only did the S&P 500 recapture the 50- and 200-day moving averages but also support-turned-resistance at 2600-plus. It is currently testing another crucial level at just north of 2800, which since October last year denied rally attempts several times (Chart 1). A decisive break can potentially cause shorts to turn tail. At least some. Bulls hope so. They also hope this sets in motion improvement in investor sentiment and that money on the sidelines begins to reenter.

There is dry powder. Tons of it.

As of Wednesday this week, $3.1 trillion sits in US money-market funds. Since the aforementioned low in the S&P 500, these assets have gone up by nearly $73 billion, and by $241 billion since the week ended October 3 last year (courtesy of ICI). Stocks peaked early October.

Along the same lines, since late December through Wednesday this week, US-based equity funds lost $21 billion (courtesy of Lipper). Longs have used the rally to lighten up/exit. Since early October last year, nearly $129 billion has been withdrawn.

Investor sentiment is the same way.

Chart 2 reflects sentiment on behalf of newsletter writers. In the latest week, Investors Intelligence bulls fell five-tenths of a percentage point to 52.4 percent, even as bears rose eight-tenths of a percentage point to 21.4 percent. The last time the bulls-to-bears ratio printed three or higher was the week ended October 9 last year. One week before that, bulls were 61.8 percent and bears 18.6 percent. The last time the ratio hit four or higher was late January last year.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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