Something unusual has happened over the past few weeks. Ned Davis Research said the daily trading sentiment composite index went from extremely pessimistic to extremely optimistic within three weeks. Through Monday’s close, the indicator remained at 63.3. A number above 60 indicates excessive optimism. This change is also reflected in the US stock market. The S&P 500 index has risen more than 1.7% over the past month. Wednesday set new records for intraday and closing prices. .SPX YTD Mountain SPX Year-to-date Ed Clissold, chief U.S. strategist at Ned Davis Research, highlighted three reasons for the reversal: Retail revival: Clissold noted that the latest American Association of Individual Investors survey showed the highest number of bulls since last December. Bullish on financial institutions: He added that financial institution sentiment was the highest since December 2023. Big drop in VIX: Wall Street’s fear gauge, the CBOE Volatility Index, fell this week to its lowest level in more than a year. The most recent trading price was around $14, compared to the long-term average of around $20. For investors, this is a warning sign that the decline could continue. NDR noted that when sentiment indicators enter the realm of excessive optimism, the S&P 500 index suffers an average annual loss of 4.93%. Indeed, Clissold points out that “major peaks in the market are often much higher, often in the high 70s or low 80s, compared to the current value of 63.”
