Amid mixed sentiment and rising risks, stocks plow ahead
Contrarian bull/bear signals? Our chart on the mismatch between stock performance and sentiment shows why investors may want to prepare for a pullback.
June 5, 2020 | 1 minute read
Stocks continued to march higher this week and have now seen a meteoric rise of over 40% since their low on March 23.1 Much of the climb can be attributed to the extraordinary levels of fiscal and monetary stimulus since the health crisis began combined with optimism that the U.S. economy will quickly recover as states begin to reopen.
Given the massive moves down and then up since late February, though, it’s fair for investors to take a step back and question what may be next. Indeed, many economic indicators have likely already bottomed. Yet we also remain in the early stages of the COVID-19 pandemic, and much of the current fiscal support is scheduled to end on July 31. Similarly, tensions have risen again between the U.S. and China, and stocks remain expensive by historical standards.
Even major Wall Street analysts seem conflicted as the Citi Panic/Euphoria Model and the Bank of America Bull & Bear indicator, two key sentiment indicators, are currently flashing contradictory readings.
Predicting the market’s direction next week or next month is difficult at any time but seems particularly perilous at the moment. Against this backdrop, however, investors may be wise to monitor potential risks within their portfolios and be prepared for a potential pullback.
The chart shows another indicator, the AAII Investor Sentiment Survey, which measures individual investors’ expectations for the stock market in the next 6 months.2 It highlights both that individual investors remain bearish – though less so than a few weeks back – and that the S&P 500, historically pretty closely aligned with sentiment, began to decouple from it in mid-March.2