Sentiment: Divergences Appearing Between Investors and Advisors
Sentiment data over the past month presented a legitimate surprise as investor sentiment has deteriorated for the second straight month (and is not wildly bullish) while advisor sentiment has surged and is basically matching the highs for the year! The main catalyst for this change, presumably, is the election. Investors may see the election result as usher-ing in more political volatility, and as such, are less bullish about the outlook for stocks. Advisors, however, are likely more focused on the prospects of pro-growth policies of the incoming administration and continued Fed rate cuts and that’s propelled advisor sentiment to bullishness not seen since July.
From a market standpoint, this divergence is mostly positive because we are not getting the type of bullish fever from investors that new highs would usually welcome and as such, sentiment from investors is not at a level that would typically warn of a imminent reversal. Bottom line, skepticism in investors fuels rallies and despite the new highs, skepticism amongst investors has risen in the last two months.
Regarding the advisors’ data, that level of bullishness does warrant some pause although the large jump post-election implies it’s policy expectations driving the bullishness, not greed or irrational exuberance (meaning that if we get pro-growth policies, and there are no major surprises, stocks should continue to rally).Bottom line, this month’s sentiment data is not enough to make us worry that sentiment is to bullish and the rally is about to run out of steam.
- The CNN Fear/Greed Indicator currently sits at 67 (on a scale of 0-100). That’s solidly in the “greed” zone. The Fear/Greed Index has become more widely followed on the Street because it incorporates seven different momentum and sentiment indicators and, as such, provides a wide view of current investor and market sentiment. The 67 reading puts this indicator in the greed zone, although it’s essentially in line with the last two months’ readings (65and 64). And it’s still a solid way from “extreme greed” that would make us nervous that investors have become too positive (that starts at 75).Bottom line, the 67r eading does imply investors are greedy but again we’d have expected a larger jump given the new highs in stocks and this reading implies at least some skepticism of the rally remains in place. That is good news.
- Investors Intelligence Advisor Sentiment Survey has a Bulls/Bears spread of 41.7%, a very bullish reading. The Investors Intelligence Advisor Sentiment Index is similar to the AAII survey, but it polls financial advisors, not individual investors. It’s also referenced slightly differently as a spread of bulls/bears as opposed to percentages of each vs. a benchmark. Unlike regular investors, who have become more cautious on the rally, advisors have become “bulled up” as a spread above 35 is considered in the range
This may sound like mumbo jumbo, but it is some of the indicators that can warn us of a coming downturn in stocks. So far, all indicates that this bull market is still solid. I expect a Santa Claus rally so extra money for Christmas is real.
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