Lucas Jackson/Reuters
Despite the fact that the S&P 500 is 3% below its record high, investor sentiment is still bearish.
Fearful investors and the lack of euphoria are buy signals for contrarian investors.
Bullish investor sentiment declined for the third consecutive week and is well below the historical average as per AAII's most current survey.
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Stocks have historically climbed up a wall of fear. Investors are constantly worried about everything, from rising inflation to the US debt ceiling showdown.
This is why the stock market could have more upside, since the lack of euphoric feeling among investors flashes an alert for contrarians.
Despite the fact that the S&P 500 is trading just 3% lower than its record high, there are still plenty of bearish sentiments. CNN's Fear and Greed Index, for example, is still in "Fear" territory at 34. This is much worse than the 53-point neutral reading last month, but slightly less frightening than the 25-point "Extreme Fear", reading last week.
The stock market sell-off in the last month saw the tech-rich Nasdaq 100 drop nearly 8% from its record high. This caused a panic in investor sentiment. Volatility was caused by the Debt Ceiling Showdown between Republicans in Congress and Democrats in Congress. However, there was also a rapid jump in interest rates and oil prices and inflationary data.
AAII's investor mood survey supports the bearish sentiment in CNN's Fear and Greed Index. Bullish investor sentiment dropped to 25.5% for the week ending October 6. This is well below the historical average 38% and represents the third consecutive weekly drop in bullish sentiment. This was also the fourth consecutive week of bullish sentiment that was below its historical average.
The trend data in Google searches for "dow jones", which Nicholas Carson, DataTrek founder, says is a declining indicator for stocks, is also a positive sign. According to the theory, spikes in stock market volatility can lead Main Street investors to panic-searching for answers. A steady decline in searches is a sign that consumer confidence has returned.
Google search interest in the term "dow Jones" has dropped by 32% since its peak in September. This suggests that consumers are less interested now in stocks and may be shifting their attention to the holiday season. This would correspond with a bullish year-end for stocks.
Fundstrat's Tom Lee believes that there is potential for a bullish turn in the stock market heading into the year-end. He argued that the S&P 500 could climb over the current wall of worry to surge up to 4,700, which would represent an additional 6% upside compared with current levels.
