In a surprising turn of events, investors have become optimistic about the stock market, which has caused a dip in the market in the past few trading days. According to a recent survey from the American Association of Individual Investors, bullish respondents stood at 58%, while bears were at about 43% – or about 15% net bullish. This increase in horned animal spirits is a vast improvement from late last year when the survey read almost 40% net bearish.
The market’s response to this increase in optimism has been significant. The S&P 500 has experienced a just over 20% rally from the October bear market low. This surge is great news as market participants are growing confident that the economy and corporate earnings will stabilize. However, there aren’t that many buyers of stocks at present, which has led to a 2% dip from the recent peak of its rally earlier this month.
Bank of America’s sentiment reading, which moved from extreme bearishness to bullishness, illustrates this shift in investor outlook. While it’s no longer ‘extreme bearish,’ the lack of buyers in the market could pose a challenge moving forward. As always with the stock market, only time will tell how long this shift in sentiment lasts and what this means for investors.
Cash Levels Are Down As Managers Use It To Buy Stocks
Although portfolio managers still hold a considerable amount of cash, with an average of just above 5% of their fund, they have decreased their cash levels in the last few months. This decrease is because funds have been taking advantage of the opportunity to buy stocks when the prices are low. However, managers have decided to take a break from buying for now since the market run-up.
The S&P 500 has seen sellers come to knock it lower from its peak, and Yardeni Research’s Ed Yardeni writes that this tumble from that high could continue down to the 4200 level from just over 4300 right now. The market’s technics don’t look enticing for those who want to enter the market at this moment.
The 4200 point is around the index’s 50-day moving average, and it should hold there so long as markets continue to expect earnings to grow, supporting stock prices. This point is where buyers finally stepped in this spring to send the index firmly above it. That means buyers could come in once again to “support” the index should it fall to that point again.
Yardeni sees the market fundamentals good but the technicals poor. To that point, rates may stop rising, and the economy and earnings may recover. Stocks are expected to take a breather for a while this year before the market sees any more substantial gains.