Hate It or Love It: Sentiment's Message

We are always quick to remind investors of the importance in distinguishing between attitudinal and behavioral measures of investor sentiment. The former tracks how investors feel—or what they're saying—about the market, whereas the latter tracks what investors are doing with their money. At times, there are major differences between both; and at crucial turning points in cycles, the difference has important implications for future returns.

Arguably, the most popular attitudinal metric is the weekly Investor Sentiment Survey put out by the American Association of Individual Investors (AAII), which asks investors whether they are bullish, bearish, or neutral on the market looking out over the next six months. Looking at the spread between the share of bulls and bears, which you can see in the chart below, it collapsed swiftly in April (meaning bears outnumbered bulls) to a level consistent with the lows seen toward the end of the bear market in 2022.

Another attitudinal metric, Investors Intelligence (II) measures bullish and bearish sentiment based on stock market newsletter editors. Looking again at the spread between the share of bulls and bears, you can see that sentiment declined swiftly to levels associated with prior bear markets. It didn't reach the lows in the 2022 bear market but was consistent with the levels seen in December 2018 and March 2020.

Moving onto behavioral sentiment, the story is a bit different. In addition to its weekly sentiment survey, AAII also tracks members' positioning and exposure to bonds, equities, and cash on a monthly basis. As shown in the chart below, equity positions have dipped a bit over the past couple months, but not dramatically. In short, investors have been telling AAII that they feel as if we're in a deep bear market, but haven't reflected that in their stock exposure—a dynamic akin to what we saw in June 2022 (when the bear market was only halfway complete).

Another area in which we haven't seen much panicky behavior has been the options market. Shown below is a 10-day moving average of the Chicago Board Options Exchange (CBOE) equity put/call ratio, which measures the number of bullish bets relative to bearish bets in the options market. You can see that the ratio tends to spike to elevated levels during major market lows—in late 2018, March/April 2020, and late 2022, for example. It moved higher during the April plunge, but it's a stretch to say it was consistent with typical end-of-bear behavior.

Even though there was a pickup in put buying, there wasn't a commensurate, aggressive selling of equities—which we can track by looking at flows into equity exchange-traded funds (ETFs). Shown below, the rolling four-week total of domestic equity ETF flows as a percentage of S&P 500 market capitalization is still positive. Sure, it has certainly eased from the peak last year, but major market lows are typically marked by investors flushing out more of their stock holdings, sending the percentage into negative territory.

Despite the disconnect between attitudinal and behavioral metrics, the weakness in the former was enough to send most aggregate measures of sentiment (combining attitudinal and behavioral) into zones consistent with the ends of bear markets. Two of those metrics are the Smart and Dumb Money Confidence Indexes tracked by SentimenTrader (ST). Per ST, the former is comprised of things like the equity put/call ratio and small speculators' positions in equity index futures contracts—making it the trend-chasing crowd, which tends to be wrong at extremes (i.e., bull market peaks and bear market troughs). The latter tracks things like commercial hedger positions and the relationship between stocks and bonds—making it the crowd that tends to be right at extremes.

As you can see in the chart below, both Smart and Dumb Money reached extremes during the April lows, doing exactly what they tend to do when stocks reach a maximum point of pain. Smart Money was correct in its contrarian stance while Dumb Money was chasing the trend lower. Always an important caveat: these index labels are ST's, not ours.

Another aggregate measure of sentiment we like to track is the Crowd Sentiment Poll (CSP) from Ned Davis Research (NDR). It not only combines several attitudinal and behavioral metrics; it has a fairly long history, which makes it useful for looking at the market's performance depending on the CSP's zone and direction. As you can see in the chart below, the CSP dropped swiftly into "extreme pessimism" territory and is still there even after rebounding a bit of late.

If it continues to climb back into neutral territory (above the yellow dotted line at the 57 level), it will reach a zone that tends to be consistent with the strongest annualized performance for the S&P 500, per the table below.

Despite that favorable short-to-medium-term setup, it's worth pointing out a longer-term sentiment risk: household stock exposure. As you can see in the chart below, investors came into 2025 with a record amount of exposure to the equity market when it comes to asset allocation (based on Federal Reserve data dating back more than half a century). That in and of itself isn't a bad thing; it's good that more households are investing in stocks. We just think it bears keeping in mind, especially as it pertains to economic channels: more exposure to stocks implies a stronger wealth effect, both to the upside and downside.

There is no shortage of market narratives these days, especially given the dynamics regarding tariffs, Department of Government Efficiency (DOGE)-driven federal layoffs, and public disagreements in Washington over Fed policy. Looking at investor sentiment helps us take a narrative-agnostic view of things, as does looking at market breadth. Both go hand-in-hand and lately, the latter is confirming what we've seen from the former.

Shown below is the S&P 500 and NDR's multi-cap ratio of 10-day advances relative to 10-day declines, which looks at how many stocks are advancing vs. declining on a rolling 10-day basis. The ratio recently surged above NDR's key threshold of 1.9, indicating a breadth thrust (or sign of market strength) has occurred. A quick glance at the yellow line shows that prior moves above 1.9 have been consistent with the conclusions of bear markets (and in some cases, near-bear markets).

The recent thrust occurred as the S&P 500 was finishing one of its best one-month runs in the past 25 years. As we mentioned at the beginning of this report, in the past 25 years, we've only seen stronger one-month gains in 2020, 2009, 2008, 2002, and 2001. 2020, 2009, and 2002 were years in which bear markets ended. 2008 and 2001 marked only the midpoints of bear markets. Technically, the S&P 500 didn't fall into bear market territory in April, but we'd consider a decline of -18.9% a near-bear market, while also pointing out that the average member's maximum drawdown this year is -23%.

When it comes to stocks, nothing is perfect: history is not a perfect guide, sentiment is not a perfect market-timing tool (as if a "perfect" market-timing tool even exists), and breadth thrusts have at times been false signals for strong forward returns. Animal spirits and recent price action are still in bulls' favor for now, so we wouldn't be surprised to see a continued grind higher for stocks from here. Yet, given the unique nature of the current volatility backdrop, we also wouldn't be surprised to see stocks struggle at the first hints of deteriorating hard data. Up until this point, the market has priced in a panic and subsequent reversal of the worst-case tariff outcome; but the next phase is digesting a backdrop of tariff rates that are both well into double digits and a constant moving target. We expect significant index-level volatility to persist.