The Daily Breakdown: Why is sentiment so bearish?

Bearish sentiment is at certainly one of its highest ranges since 2000 regardless of shares’ minor dip from report highs. The Each day Breakdown digs in.

Friday’s TLDR

Sentiment is extremely bearish
Can the market backside?
Bonds discovering a groove

The Backside Line + Each day Breakdown

We’re nearly 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 below stress. 

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

For as we speak’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 come back 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 inclined to act as contrarian indicators. Which means that when we’ve a “washout” in sentiment — the place bullish readings are actually low and bearish readings are actually excessive — shares are inclined to type a backside. 

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

Making Sense of the Mindless

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

In the event that they’re doing dangerous, in fact sentiment is taking successful. 

Second, financial coverage uncertainty is hovering. Within the US, this measure is at its third highest stage since 2000, with solely the monetary disaster and Covid coming in increased. Globally, it’s the 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 chunk up to now. 

The Backside Line

With sentiment nearing an excessive, keep watch over markets to see if shares and crypto can discover their footing. If they will, let’s see what kind of rally develops. If they will’t, it’s potential that sentiment stays dampened and creates a form of self-fulling prophecy through decrease costs. 

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The setup — Bonds

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

That mentioned, there’s no sugarcoating it: The TLT has struggled over the long run and is down nearly 2% over the previous yr. Be aware that the TLT remains to be beneath its 200-day shifting common (in purple). 

As yields have come below stress, rate-sensitive property like bonds, dividend shares, and REITs have loved latest positive factors. 

Some energetic traders might desire a minor pullback first — which is ok — however as long as TLT can keep above the $87 to $88 space, bulls may keep latest momentum. For sustained momentum although, they’ll must see TLT regain the 200-day shifting common. 

On the draw back, a break of $87 to $88 may open up TLT to extra promoting stress. 

Choices

For some traders, choices may very well be one various to invest on TLT. Keep in mind, the chance for choices patrons is tied to the premium paid for the choice — and dropping the premium is the complete danger. 

Bulls can make the most of calls or name spreads to invest on additional upside, whereas bears can use places or put spreads to invest on the positive factors tapering off and TLT rolling over. 

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

Disclaimer:

Please notice that on account of market volatility, among the costs might have already been reached and situations performed out.