Market Update August 2022 – Poor Sentiment to the Rescue???


The economy, earnings, politics, etc… The condition of fundamentals such as these does matter, but often times it’s the sentiment of investors that shapes the responses within the capital markets.  After all, investing reflects how investors judge the probability and impact of future outcomes, which is a form of sentiment.  In one era, rising prices may be judged as a sign of economic strength.  In another regime, rising rates may be seen as an impediment to economic strength.  And each side can be correct given a broader context. 

One common gauge of sentiment is the American Association of Individual Investors (AAII) Investor Sentiment survey (as seen below), which tracks net sentiment by looking at the condition of bullish sentiment less bearish sentiment.  And, in many cases, gauges such as this can be used to identify trends to be followed.  But, trends can also signal reversals when extremes are reached.

The chart below tracks the net reading between bulls and bears from January 2000 through August 11, 2022.  The red line represents the net reading of the 30 day average of bulls minus bears, superimposed over the daily readings in grey.  The black line through the red is the middle ground with equal readings from the bulls and the bears. 

Not surprisingly, with this year’s decline in equity markets, the negative net reading has certainly been one of a bearish tone.  Yet, in the context of this time period, the net reading is looking as though it may have recently reached extremes in net-bearish sentiment coinciding with the lows last seen in March of 2009 (green line).  Could this be a signal for a reversal in the equity markets?

With the recent equity market reversal off of the June 2022 low, sentiment amongst individuals looks to be improving and possibly pointing to further gains.  Add to that evidence of brightening institutional investor sentiment and 2022 may yet see further gains.  But for now, further improving sentiment may be a welcomed condition to help combat the historically choppy months of September and October, not to mention elections in November.  And, if the market does indeed “climb a wall of worry”, 2022 may play out favorably to the surprise of many.   



Chief Investment Officer



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