Dwindling Stock Bulls See Signs of Hope in Rise of Pessimism

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Dwindling Stock Bulls See Signs of Hope in Rise of Pessimism.

stock :: 12hrs ago :: source - bloomberg

By Geoffrey Morgan

(Bloomberg) -- US stocks have churned near a record for nearly four months, with virtually every gain quickly wiped out by a bout of selling like Monday’s.

The relentless churn has pushed the number of bears in a closely watched survey of investor sentiment past the bullish group for the first time since November. And a Deutsche Bank measure of discretionary equity positioning is now underweight, according to Parag Thatte, a strategist at the bank.

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Together, the two gloomy signals add up to a green light for ever-optimistic equity bulls who, going by history, have reason to expect an uptick in stock purchases. They also point to a broadening of the rally, as investors continue to move from Big Tech into riskier smaller stocks and emerging markets.

Stocks are currently exhibiting a “rare combination of pessimism and strong breadth,” said Ed Clissold, chief US strategist at Ned Davis Research. Such a setup has been “generally positive” for US equities “and a big part of why we are maintaining our overweight allocation,” he told clients Monday.

The S&P 500 is down 0.8% from the high it set on Oct. 28, a record that preceded November’s protracted drawdown in the Magnificent 7 group of tech companies. The index last closed at a record four weeks ago and ended Monday down 2% from that level.

So far this year, both the Russell 2000 Index and an equal-weight version of the S&P 500 have climbed at least 5.2% as investors have rotated out of mega-cap tech names into the smaller, riskier stocks and into energy, materials and consumer staples names.

Still, “sentiment and exposure have driven off a cliff,” Andrew Greenebaum, senior vice-president of US product management at Jefferies LLC, said in a note to clients.

“We hardly see indications of ‘hold-your-nose-and-buy’ levels – which we aren’t actually sure are possible when the benchmark hasn’t even hit correction territory,” he wrote.

Aside from the growing sense of pessimism that often serves as a contrarian indicator, bulls can point to more concrete reasons for optimism. Chief among them is corporate earnings, with S&P 500 companies growing profits by 13% in the fourth quarter compared to an expected advance of just under 9%, data compiled by Bloomberg Intelligence show.

And while the American Association of Individual Investors survey came in decidedly bearish, there’s some sense that like with other sentiment surveys, for example on consumer sentiment, respondents are saying one thing, and doing another.

“They’re saying ‘We’re not that bullish,’ but look at what they’re doing – they’re adding risk,” said Matt Miskin, co-chief investment strategist at Manulife John Hancock Investments.

Miskin said that if you look “under the hood” of the market, investors have been pushing into riskier stocks. They are also placing amplified wagers on more gains, using products like single-stock ETFs with leverage. And retail investors have been “buying the dips and have been incredibly successful at it,” he said by phone.

Greenbaum pointed out several bullish developments over the most recent earnings season, including that roughly half of S&P 500 members reported positive guidance revisions, which is the highest proportion since the second quarter of 2021.

“These businesses aren’t broken, they’re growing and right now people are choosing to not give them credit and I suspect that will change in the medium term,” he said. “I would be shocked if we didn’t start to see stocks grind higher.”

Specifically, he noted a Ned Davis Research sentiment index fell into a pessimistic range on Feb. 11. Meanwhile, over 62% of S&P 500 members remain above their 200-day moving averages even after a prolonged rotation out of large technology stocks and into the value and small- and mid-cap stocks. And the S&P 500 Advance/Decline line is at an all-time high.

“The criteria seem to capture a mature bull market not headed for an immediate collapse more than the start of a major up leg,” he writes.

To be sure, investors are also grappling with rising levels of policy uncertainty after Trump’s tariffs were thrown out by the US Supreme Court before being hastily revamped Friday afternoon. Rolling concerns that new AI tools will wipe out revenue streams at a range of companies continue to weigh on stocks.

The S&P 500 is trading in a “messy range” and the bank’s own sentiment indicators “has suggested some tactical caution,” Dirk Willer, Citigroup Global Markets Inc.’s head of macro strategy and asset allocation, said in a recent note to clients. Still, the bank re-iterated its overweight stance on US stocks while reducing exposure to tech and shuffling 50% of its holdings to small caps.

“Our equity strategists believe that the broadening has more room to run,” he said.