Why is sentiment so bearish?

Bearish sentiment is at one among its highest ranges since 2000 regardless of shares’ minor dip from file highs. The Day by day Breakdown digs in.

Friday’s TLDR

Sentiment is extremely bearish
Can the market backside?
Bonds discovering a groove

The Backside Line + Day by day Breakdown

We’re virtually two months into 2025 and it’s been a bumpy journey. The S&P 500 is about flat on the 12 months and down about 2% over the previous three months. The sugar excessive we noticed instantly after the election has worn off as shares, shopper confidence, and sentiment have all come underneath strain. 

Talking on that final observe — sentiment — we’ve seen fairly an fascinating growth. There are a couple of sentiment readings on the market, just like the NAAIM, the CNN “Concern & Greed” Index, and the AAII survey. (Be happy to bookmark these for the longer term, too). 

For as we speak’s dialogue, I’ll be specializing in the bull and bear sentiment surveys from AAII, beginning with the bulls: 

Since 2000, the bottom bull studying was 15.8, whereas this week rang in at 19.4. Readings beneath 20 have a tendency to return into play close to a trough in sentiment. 

On the flip aspect, bearish sentiment tends to spike throughout instances of uncertainty. Discover how prior spikes above 60 occurred close to the depths of the monetary disaster, the lows of the 2022 bear market…and proper now: 

Sentiment extremes are inclined to act as contrarian indicators. That means that when we now have a “washout” in sentiment — the place bullish readings are actually low and bearish readings are actually excessive — shares are inclined to kind a backside. 

(The other might be true on the upside, too. When bullish readings get towards an excessive excessive and bearish readings close to an excessive low, markets are inclined to high and pull again). 

The fascinating factor right here is, the S&P 500 was about 3% off its all-time excessive when this week’s survey was launched. That’s not one thing we are inclined to see when sentiment is that this low. 

Making Sense of the Mindless

It’s arduous to say what precisely is driving this response, however a couple of issues stick out. First, regardless that 9 of the S&P 500’s 11 sectors are optimistic on the 12 months, the 2 sectors which can be decrease — tech and shopper discretionary — are main holdings for traders. 

In the event that they’re doing unhealthy, after all sentiment is taking successful. 

Second, financial coverage uncertainty is hovering. Within the US, this measure is at its third highest degree since 2000, with solely the monetary disaster and Covid coming in larger. Globally, it’s the best it’s been since Covid…and it’s near surpassing that determine proper now.

The back-and-forth tariff threats are carrying on traders, even when they’ve been extra bark than chunk to this point. 

The Backside Line

With sentiment nearing an excessive, keep watch over markets to see if shares and crypto can discover their footing. If they will, let’s see what kind of rally develops. If they will’t, it’s doable that sentiment stays dampened and creates a type of self-fulling prophecy by way of decrease costs. 

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The setup — Bonds

One of the vital-traded bond ETFs is the TLT, which has been in demand in latest buying and selling. In actual fact, it’s up about 4.5% up to now this 12 months and has had some latest pep in its step after breaking out over downtrend resistance. 

That mentioned, there’s no sugarcoating it: The TLT has struggled over the long run and is down virtually 2% over the previous 12 months. Observe that the TLT continues to be beneath its 200-day transferring common (in crimson). 

As yields have come underneath strain, rate-sensitive property like bonds, dividend shares, and REITs have loved latest features. 

Some energetic traders could want a minor pullback first — which is ok — however as long as TLT can keep above the $87 to $88 space, bulls might preserve latest momentum. For sustained momentum although, they’ll have to see TLT regain the 200-day transferring common. 

On the draw back, a break of $87 to $88 might open up TLT to extra promoting strain. 

Choices

For some traders, choices might be one various to take a position on TLT. Bear in mind, the chance for choices consumers is tied to the premium paid for the choice — and dropping the premium is the complete danger. 

Bulls can make the most of calls or name spreads to take a position on additional upside, whereas bears can use places or put spreads to take a position on the features truly fizzling out and TLT rolling over. 

For these trying to be taught extra about choices, contemplate visiting the eToro Academy.

Disclaimer:

Please observe that as a result of market volatility, a number of the costs could have already been reached and eventualities performed out.