- According to Ned Davis Research, a sustained stock market rally will not occur if investors remain bearish.
- Recent weeks have seen bearish extremes in investor sentiment as inflation and concerns about interest rates persist.
- NDR stated that “Sentiment would have to remain subdued” to provide a barrier for the market to climb.
According to a Thursday note by the WSJ, a rally in stock markets heading into 2023 will not be sustained if investor sentiment is in bearish territory. Ned Davis Research.
So far so good. NDR’s proprietary trading sentiment composite is still in “extreme pessimism”. CNN’s Fear and Greed IndexIs in “fear” territory Weekly investor sentiment survey by AAIIShows an overwhelming number of bearish reactions at almost 60%
This is it! S&P 500Following the release of the data last week, the intra-year high was up 7% CPI Report SeptemberThe market still has some way to go before it can reach the levels it reached two months ago. Investors need to be more optimistic than ever, or it could just be another bear market bounce.
NDR stated that “Sentiment should remain subdued to provide a wall of concern for the market to climb…A quick leap from pessimism towards optimism would signal that the rally may be over.”
According to the note, the market is expected to benefit from some tailwinds as the fourth quarter was the strongest in the year. Also, favorable seasonal patterns have been observed before and after mid-term elections.
NDR stated that the fourth quarter of the midterm years is the most productive three-quarter stretch in the presidential cycle.
These seasonal tailwinds, which are often mentioned as tendencies, are not real. They’re uncertain. NDR warned, “There are not guarantees in this industry.”
Instead of relying on seasonal tailwinds investors should pay more attention to ongoing sentiment and technical indicators that will indicate whether a possible year-end rally is still possible into 2023.
Fundamentally, resilient earnings, lower inflation and a more hawkish Fed are all signs that the economy is ready for a soft landing. NDR stated.
This means that there is upside potential, if everything goes according to plan. As few people are ready for such a move.Many investors believe the Fed would continue to increase its interest rates until inflation falls, which is what most investors expect. They “break something”, which leads to a hard economic landing.
NDR stated that the market must see evidence that the economy is cooling enough for inflation to be brought down, but not too much to cause sharp earnings drops and recessions.
It will be possible to see the evidence over the next weeks and months. However, investors should remain cautious about investing if they don’t want to see the wall fall.
Rallyes can bring traders off the sidelines, but that is not their intention. NDR explained that the difference between short-term bounces, and sustained advances is that the former includes a wallof worry that gradually draws investors into the market.
