As a holiday-shortened week comes to an end, the S&P 500, which has been enjoying a remarkable rebound from April’s lows, may be poised to set a new record on Wednesday.
Pat Tschosik, chief thematic strategist and London Stockton, analyst at Ned Davis Research, informed investors in a new note that there have only been six such instances in the past 60 years of the S&P 500 SPX gaining more than 20% in a two-month period.
The pair feels that there isn’t much of an investor wow factor despite this outstanding success, most likely because some pessimists are still there. When they ultimately give in, those pessimistic holdouts—who blame Democratic investors—may pave the way for another surge, according to Tschosik and Stockton, our call of the day.
With some support, the Ned Davis team investigated the state of investor sentiment by examining a number of polls and metrics. They began by creating their own daily trading sentiment composite, a 0-100 scale that combines valuation, asset flow, sentiment, and other metrics. With the exception of the pandemic, the gauge has risen above 70 during comparable 20% two-month gains for the S&P 500 since 1975.
However, following the latest 20.5% surge in the S&P 500, that measure only increased to 62.2. The statement by Tschosik and Stockton indicated that “we started from a very low level of pessimism and that a meaningful amount of pessimism remains.” They went on to say that since December 10, this attitude indicator hasn’t spent more than two days in the area of extreme optimism.
Furthermore, their audience sentiment survey is below its 10-year average and has been in neutral zone for the last few months.
The two then examined a selection of additional polls, including one conducted by the Commodity Futures Trading Commission among individual traders, editors of financial newsletters, and traders of commercial futures. They contrasted those surveys’ current values with their 10-year averages.
According to Tschosik and Stockton, the American Association of Individual Investors survey, which indicated only 24.7% of investors were bulls as of mid-March, stood out. With a computed bull reading of 46.8%, they conclude that this group of investors is more bearish than other surveys they examined, even though the number of bullish investors recovered by May.
Bulls benefit from this because it creates space for the market to rise as these bears turn into bulls. “When bulls are below 59.5%, the S&P 500 has returned 10.8% annually,” they stated.
This leads us to the two of them investigating the origin of those bear holdouts. When Tschosik and Stockton examined consumer sentiment by political party, they found that Democrats had experienced a precipitous decline. “The current sentiment reading for Democrats is not only its lowest level since 2017, it is the lowest level relative to Republicans,” they stated.
They believe that since the second half of the year presents grounds to exercise caution, it is unclear if too-positive Republicans or too-negative Democrats are correct when it comes to markets.
When those low mood levels are combined with other signs they are keeping an eye on, like breadth thrusts, a bullish technical signal for equities, the pair concludes that “Democrat investor capitulation could fuel the next up-leg of the market.”
Preceding the latest record highs, a recent Gallup Poll revealed that 60% of investors are concerned about stock market volatility. This is another area where party affiliation is evident, as 48% of Democrats and only 9% of Republicans were surveyed as “very concerned” about recent market ups and downs.
