Bearish sentiment still suggestive of a Wall of Worry

Key Takeaways
  • SPX has rallied to just under resistance ahead of the important Jackson Hole speech
  • Sentiment measures still show excessively bearish sentiment
  • Energy has outperformed in the last week, while Technology has lagged
Bearish sentiment still suggestive of a Wall of Worry
Bearish sentiment still suggestive of a Wall of Worry

The ratcheting up in prices ahead of Powell’s Jackson Hole comments likely makes for a tricky situation in the short run.   SPX could likely find strong resistance directly overhead near 4214-4225, an area which would successfully fill the gap from 8/19 into 8/22.  This area also represents a 50% retracement level of the decline from 8/16.   Looking back, Thursday’s bounce coincided with a meaningful reversal in Treasury yields.  However, if Powell’s comments come in hawkish, this would likely result in yields climbing right back higher, and Equities might face selling pressure.  As seen below, ^SPX -0.17%  faced resistance back on 8/16 near its downtrend line that also lined up with a 200-day moving average.   Technically, the odds are that 4325 might not be tested right away, and prices might require some weakness into end of month.  Key support lies at Wednesday’s lows near 4120.  If this is taken out, than a quick move down to near 4000-50 might occur, but should represent a buying opportunity for strength into mid-September.

Bearish sentiment still suggestive of a Wall of Worry
Source: Bloomberg

Sentiment still giving off very negative signals  

While SPX has now rallied nearly 15% off the lows from mid-June, even after this week’s minor drawdown, markets continue to show levels of excessive pessimism.

This CFTC CME S&P reading of Leveraged funds net S&P 500 exposure via Futures contracts remains negative, even after the outsized ~15% rally off the lows in the last two months.

In the chart below, it’s evident that January 2022 peaks occurred with sentiment (measured by net long S&P Exposure) was as high as it had been in the last few years.  Now the short positions are as extreme as 2015, nearly seven years ago. 


While this week’s rally on light volume might need to consolidate into the next week following Powell’s comments, this kind of bearish positioning gives me confidence that any selloff should prove mild and would provide a floor to any selling pressure.   Mid-term seasonality studies are still suggestive of a 4Q rally once any late September/early October selloff runs its course.

Bearish sentiment still suggestive of a Wall of Worry
Source:  Bloomberg

AAII Bears have reached new four-week highs while Bulls are hovering at four-week lows

Interestingly enough, AAII sentiment has now contracted sharply with the number of Bulls having moved to four-week lows, while the percentage of Bears is now the highest in over four weeks’ time.

Investors seem to be putting more weight on possible economic weakness than they are in actual price action, breadth and momentum expansion and sector participation lately.  The uncertainty ahead of the FOMC means that a further rally into Friday is likely, with targets up just above 4220.

Only a move down under 4120 would turn allow for a more volatile decline.  However, even in this case, it’s thought that 4000 would present a meaningful floor to a decline, and prices should not yet be in the position to pull back to 3850.

Bearish sentiment still suggestive of a Wall of Worry
Source:  AAII, Twitter

Performance data shows Energy having turned in persistently strong returns, while Technology has given back some of last month’s gains

Over the past week, only Energy and Equal-weighed Materials managed to turn in positive performance.

XLK -0.69%  and XLY -0.11%  which turned in the best performance of any of the major S&P SPDR ETF’s over the past three months, were the worst performers over the last 5-days of rolling returns.

While it’s expected that Technology and Discretionary might face some temporary headwinds on a 5-6 week basis into early October, these groups remain strong groups to favor for rallies up into early to mid-September.


The kickoff of Defensive outperformance which happened this past week likely could help portfolios sustain less damage on any selloff into October, it’s thought that Utilities and Consumer Staples are both are sectors to consider rotating back out of into early October while considering positioning into Technology, along with Energy.

Bearish sentiment still suggestive of a Wall of Worry
Source: Optuma
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