There have been plenty of things to worry about as this stock market downtrend progressed. However, those concerns didn’t include individual investors’ attitudes. The speculative chase of easy money, borne of the extreme days in early 2021, buoyed stock investors’ optimism.
Now the hopeful enthusiasm is evaporating. Bullish readings are falling as bearish ones rise. That accelerating shift removes the last prop in the already weak stock market.
From the Investors Intelligence US Advisors Sentiment Survey:
- Feb. 15 – bulls = 33.7%, bears = 27.9%
- Feb. 22 – bulls = 32.2%, bears = 31.0%
- Mar. 1 – bulls = 29.9%, bears = 34.5%
Why aren’t those readings a contrarian sign that this is a good time to buy?
Because attitudes are not low “enough.” How to judge where the downtrend will stop? When investors truly flip, and bearishness rules.
Where will the market be then?
Low enough (and dramatic enough) to create investor pessimism. With the downtrend in place and attitudes now shifting significantly, it could be soon – or it could take time to wash out the stubborn remnants of 2021’s popular stocks and stock investing themes.
When you said attitudes were the last prop, what did you mean?
The stock market’s relentless downtrend has pushed it and a multitude of individual stocks through key support levels: moving averages, percentage-down barriers, and price barriers based on previous stock/index behavior.
Moreover, the downtrend has been one of sharp declines interrupted by short-lived, smaller rises. Additionally, the tendency has been for positive fundamental rises (e.g., good earnings reports) to reverse quickly. Those moves have produced a classic downtrend pattern of “lower-highs and lower-lows.”
Added to that ugly performance picture are the serious fundamental concerns with uncertain effects and outcomes: rising inflation, rising interest rates and Russia.
A bearish indicator caused by something missing
Those numerous articles talking about what a particular hedge fund had bought are fewer now. Why? Probably because the funds are actively selling and shorting. Not until they have completed making those transactions might they be willing to talk about it – or not.
The bottom line: Wait to buy until you don’t want to buy
Buying at the bottom of a major drop means going against your emotions. At that time, all investors (including professionals) feel they should wait – that surely the market has one more, sharp drop coming. (For more, see my February 23 article, “Stock Market Selloff Looks Unfinished, And That’s Promising”)