Two the Point — Have Investors Panicked Enough?

Market Insights in Two Minutes – Investor sentiment can be a very useful tool when assessing the stock market.  The more negative investors become, the more likely it is that the stock market is close to a bottom.  When it comes to market volatility and investor sentiment, extremes don’t last long.

There are many pieces to the investor sentiment puzzle, and properly assessing them can give us clues about how much volatility may be behind us…or yet to come.  Below, we find two different investor sentiment surveys – one indicating historically extreme negativity, the other not.  What is our interpretation?

We do not believe that investor sentiment is sufficiently negative to indicate a near-term low in stocks.  The American Association of Individual Investors survey (left side) is heavily weighted toward retail investors.  We think the extreme pessimism reflected in this survey is a function of the carnage in recent retail favorites likes Coinbase, Roku, or Zoom versus a true indication of broad market negativity. 

Other sentiment data points, like the Investor Intelligence survey (right side), are less extreme.  Actual investor activity in the options market, like the amount of Put Option buying (protection) versus Call Option buying (upside speculation), also falls short of negative extremes.

Source: Factset; Bryn Mawr Trust


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