| | | Sharp Sentiment Shift Could Be 2025’s First Opportunity
By Patrick Martin, Managing Editor
myaccount.schaeffersresearch.com
At the risk of dating myself, the ‘vibes,’ of the stock market feel … different in 2025. It took the Dow Jones Industrial Average (DJI), S&P 500 Index (SPX), and Nasdaq Composite (IXIC) only one week of choppy trading last year before resuming their uptrends from 2023. There was no Santa Claus rally this year, and many high-profile stocks have not gotten off the bus to start this calendar year. This is the first weekly win of the year for all three major indexes and even gains for usual tech heavyweights are more muted.
The culprits for this general market malaise are well-documented. There’s some squeamishness about a second term of U.S. President-elect Donald Trump and the extent to which tariffs will be wielded. Bond yields are always a lightning rod, as are sticky inflation data and Fed fatigue, all of which are anchors weighing down a normally resilient Big Tech. Of the three companies with a market cap of $3 trillion or more, Nvidia (NVDA) and Microsoft (MSFT) needed a Friday melt-up just to get into the black year-to-date, while Apple (AAPL) is still down 8.3% to start 2025, exacerbated by recent claims of its China underperformance. All of that concentration at the top great is when tech outperforms; a rising tide lifts all boats. But conversely, when Wall Street’s luminaries course correct, the ‘vibe’ suffers. But does that tell the story? The historical data says not so fast.
Three weeks into 2025 and now we have hard data to back up this feeling of uneasiness that has been permeating Wall Street the last two weeks. Per Schaeffer’s Senior Quantitative Analyst Rocky White, as of Jan. 10, there was a dramatic drop in optimism in this week’s Investors Intelligence (II) II poll. The bulls minus bears line fell from about 33% to 10%, the biggest falloff since December 2018 and second biggest since 1987.
The table below shows the returns across various time frames after sudden shifts in sentiment. The negative numbers surrounding 1987 look daunting, but Black Monday followed just three days after that October poll date. The better news is at the top of the table below. After the 23% sentiment shift in 2018, the S&P 500 proceeded to rattle off a 7.2% win the next month and 14% over the next three. Back in April of this year, a 17% drop-off from bulls to bears saw stocks rally 6.8%, 10.8%, and 18.1% across respective four-week, three-month, and six-month timeframes.
Looking back at data since 2005, the bulls are now below their long-term average, while bears are well above their long-term average. The bulls - bears line went from 32.7% last week to 10.2% this week, in the 34th percentile of readings since 1972. Last week it was in the 78th percentile. One-fourth of surveyed advisors foresee a correction in the stock market.
This has been a slow burn that has ignited in recent weeks. The American Association of Individual Investor (AAII) survey pinpointed a similarly sharp change in sentiment to start 2025. Bullish sentiment is currently at its lowest level since November 2023 and has halved since September. Bearish sentiment also outweighed bullish sentiment for the second-straight week for the first time since November 2023, per Senior Market Strategist Chris Prybal.
Bears seem to be putting their money where their mouth is, for now. Short interest on the Nasdaq-100 (NDX), SPX, and Russell 2000 (RUT) indexes sits up 16.4%, 18.6%, and 21%, respectively, year-over-year. Per the charts below, short interest is at elevated levels for all three indexes looking at the last five years.
Options traders though, have been slow to the draw. Senior V.P. of Research Todd Salamone noted in this week’s Outlook that short-term option buyers are positioning themselves for significant upside, per the 10-day, buy-to-open put/call volume ratio on SPX components. With the SPX reclaiming 6,000 and holding the head-and-shoulder topping pattern Todd warned about on Monday, all of that short interest tied up could soon capitulate.
Emboldened bears means opportunity for contrarians to target individual equities that are feeling the pressure. Kroger (KR) is down only 4.7% to start the year but has seen a 307% increase in short interest since Dec. 15. That’s an awful lot of reactionary pessimism for a stock that is up 27% year-over-year. To show how potent short interest increases can be, take Qorvo (QRVO). The chipmaker added 12.1% on Friday after Starboard Value took a 7.7% stake in the company. Short interest on QRVO is up 91% in the most recent reporting period. Prior to Friday, a healthy 8% of the stock’s total available float was sold short and it would have taken shorts less than three trading days to buy back their bearish bets. All of that pent-up pessimism surely played a role in QRVO’s outsized move today.
The stats compiled above are another reminder to let the financial media handwringing go in one ear and out the other. Similar to volatility, a shrewd contrarian trader should welcome pessimism, as long as they adhere to Schaeffer’s Expectational Analysis and monitor technical pivot points. |
|
