The First Signs of a Sentiment Reversal Are Here

Last year, under the surface, crazy setups were popping up all over the financial world...

Don't get me wrong. It was a darn painful year for investors. But it had one upside. Folks became bearish on all kinds of assets, from stocks to commodities to bonds... which is exactly what needs to happen before a turnaround.

Investor sentiment washed out, only to get worse and worse. And by the time stocks bottomed in October, nearly everyone expected more disaster.

The disaster hasn't come, though. Instead, stocks have climbed higher in 2023. And as I've explained recently, key signals are telling us the bear market is likely over.

Individual investors are finally starting to notice. They're getting bullish for the first time since the bear market began last year. But there's still a long way to go before that change in sentiment could slow down this rally.

Let me explain...

Mom-and-pop investors tend to be the last ones to jump on an investment trend.

These folks don't follow the day-to-day news of the investment world. So by the time they hear it's a good time to buy (or sell), the move is usually over.

That's why extreme sentiment readings from these folks tend to be powerful contrarian signals. When they all pile in at once, you want to do the opposite.

Based on one measure, this group was near record levels of bearishness last fall... right around the time stocks bottomed. But the situation has reversed since then. Earlier this month, mom-and-pop investors were as bullish as we've seen since the bear market began.

To see it, we'll look at the American Association of Individual Investors' ("AAII") Investor Sentiment Survey. This weekly survey asks mom-and-pop investors if they're bullish, bearish, or neutral on how stocks will perform over the next six months.

From there, we can build the "bull ratio" to gain further insight. That's just the number of bulls divided by the total number of investors (excluding the neutral respondents).

A high bull ratio means mom-and-pop investors are excited about stocks. And that figure hit a year-plus high in early February. Take a look...

Individual investors were extremely pessimistic about stocks last fall. But they've reversed course in recent months.

That drove this ratio up to 60. Any reading above 50 means there are more bulls than bears. And this is the first time we've seen that happen since the bear market began in June last year. This reading is also the highest since November 2021.

You could view this as a bad sign. Sentiment is getting bullish. And that's generally a contrarian signal. But we've still got a long way to go before you should worry...

The recent reading of 60 is still well below the 2021 high of nearly 74. And we've seen past readings of 80-plus, too. We won't be at a worrying level until then. Plus, folks are already spooked again, as the chart shows. Bearishness is topping bullishness again in the most recent reading.

There's still plenty of room for bullishness to grow before we see a peak... And that means we want to stay bullish as long as the trend keeps moving higher.

Good investing,

Brett Eversole

Further Reading

"Despite the market's seeming downtrend, most stocks have stopped falling," Brett writes. For the first time since the bear market began, this important indicator is showing strength. And it could mean the worst is over... Learn more here.

Mom-and-pop investors are getting less bearish – but as another contrarian gauge showed recently, that doesn't mean they've been rushing into stocks. This measure is still bearish today. And with all this fear in the markets, the market has plenty of room to rise... Read more here.