Halloween brought more treats than tricks as November brought the first real S&P 500 break out of its long and volatile trading range dating back to January 2018. Hopes for a United States-China trade deal and ample liquidity courtesy of the Federal Reserve have been in focus; although economic data is not confirming the market’s latest advance. Bulls are saying the market is right and economic data will imminently (or eventually?) catch up; bears are saying the economy is right and the market has gotten ahead of itself.
In the middle of the debate
With a tactical recommendation of “neutral” as it relates to overall U.S. equity exposure (but an overweight to large cap stocks at the expense of small cap stocks), I would put myself squarely in the middle of that debate. But if I were a betting gal (I hate gambling), I’d place a small wager on the bear’s case that the market may have gotten a little ahead of itself. That brings up the topic of this report: an update on investor sentiment and positioning and what they might say about the near-term direction of the market.
As most readers know I keep an eye on myriad sentiment indicators—both of the attitudinal and behavioral variety. The chart below shows the popular Crowd Sentiment Poll (CSP) calculated by Ned Davis Research (NDR). It’s an amalgamation of seven distinct sentiment indicators—including the attitudinal survey from the American Association of Individual Investors (AAII) and the behavioral put/call ratio.
As you can see in the chart below, the CSP shows sentiment as having poked its head out of neutral into the “extreme optimism” zone, albeit at the bottom rungs. In the accompanying table, you can see that stock market performance in this zone has generated the weakest annualized returns.