Investor Fear At An Extreme and Stocks Rise

Insights | Investor Fear At An Extreme and Stocks Rise

Author: David I. Templeton, CFA, Principal and Portfolio Manager

Just as investors become fearful of stocks, the equity market experiences a turnaround. Before today's (12/2/2021) trading the S&P 500 Index was down a little more than 4% from its November 18, 2021 high. Yesterday, the S&P 500 Index closed below its 50-day moving average, an area where the market has recently found support as seen in the below chart.

S&P 500 December 2, 2021 and 50 day moving average technical support

From an investor sentiment perspective, today's Sentiment Survey report by the American Association of Individual Investors saw bearish sentiment increase to its highest level in more than a year at 42.4%. The other side of the bearish coin is bullishness and it fell to a low 26.7%. 

AAII investor sentiment December 2, 2021

Bearishness is also being expressed by newsletter writers. The ratio of the bullish to bearish advisor sentiment has declined to 1.05. A ratio less than 1.0 indicates there were more newsletter authors with a bearish stance than a bullish one. The Investor Intelligence Advisors' Sentiment Survey studies over a hundred independent market newsletters and assesses each author’s current stance on the market: bullish, bearish or correction.

Investor Intelligence Advisor Sentiment December 2021

Finally, the CNN Business Fear & Greed Index now resides in the extreme fear zone too. The Fear & Greed Index is meaningful in that it incorporates seven various sentiment measures into an overall reading.

CNN Business Fear & Greed Index December 2, 2021

Sentiment measures are contrarian ones and with the widespread bearishness being expressed by many investors, today's market bounce is not too surprising. Bearishness is not at a rock bottom extreme so more choppiness might be expected. Nonetheless, with business fundamentals remaining favorable, and economic ones as well, equity prices might be setting a path for a year end rally.

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