Why is sentiment so bearish?

Bearish sentiment is at one in every of 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 yr 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 beneath strain. 

Talking on that final word — sentiment — we’ve seen fairly an fascinating growth. There are just a few sentiment readings on the market, just like the NAAIM, the CNN “Worry & Greed” Index, and the AAII survey. (Be at liberty to bookmark these for the long run, too). 

For immediately’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 occasions 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 likely to act as contrarian indicators. That means that when now we have a “washout” in sentiment — the place bullish readings are actually low and bearish readings are actually excessive — shares are likely to type a backside. 

(The alternative could be true on the upside, too. When bullish readings get towards an excessive excessive and bearish readings close to an excessive low, markets are likely 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 likely to see when sentiment is that this low. 

Making Sense of the Mindless

It’s onerous to say what precisely is driving this response, however just a few issues stick out. First, despite the fact that 9 of the S&P 500’s 11 sectors are constructive on the yr, the 2 sectors which might be decrease — tech and shopper discretionary — are main holdings for traders. 

In the event that they’re doing dangerous, after all sentiment is taking a success. 

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 increased. Globally, it’s the very best it’s been since Covid…and it’s near surpassing that determine proper now.

The back-and-forth tariff threats are sporting on traders, even when they’ve been extra bark than chew so far. 

The Backside Line

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

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The setup — Bonds

Probably the most-traded bond ETFs is the TLT, which has been in demand in current buying and selling. In truth, it’s up about 4.5% thus far this yr and has had some current pep in its step after breaking out over downtrend resistance. 

That stated, there’s no sugarcoating it: The TLT has struggled over the long term and is down virtually 2% over the previous yr. Notice that the TLT continues to be beneath its 200-day transferring common (in purple). 

As yields have come beneath strain, rate-sensitive property like bonds, dividend shares, and REITs have loved current positive aspects. 

Some lively traders could favor a minor pullback first — which is okay — however as long as TLT can keep above the $87 to $88 space, bulls might preserve current 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 different to take a position on TLT. Keep in mind, the chance for choices patrons is tied to the premium paid for the choice — and shedding 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 positive aspects tapering off and TLT rolling over. 

For these seeking to study extra about choices, contemplate visiting the eToro Academy.

Disclaimer:

Please word that attributable to market volatility, among the costs could have already been reached and situations performed out.