Pessimism About the Stock Market is on the Rise. Why It’s Still Not Bad Enough to Imply Stocks Have Hit a Bottom.

April's substantial downturn in the stock market has tempered the exuberant bullish sentiment prevalent on Wall Street. However, market strategists caution that despite the decline, the current sentiment does not yet signal an opportune entry point for investors.

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According to the latest American Association of Individual Investors (AAII) Sentiment Survey, investor optimism about the short-term outlook for U.S. stocks has waned significantly. The survey revealed that bullish sentiment, reflecting expectations of rising stock prices over the next six months, fell to 38.3%, marking its lowest level since November. Despite this decline, it still remained slightly above the historical average of 37.5% for the 24th consecutive week.

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Conversely, bearish sentiment among individual investors has been on the rise, reaching 34% over the same period. This uptick surpassed its historical average of 31% for the first time in six months, as indicated by the AAII Sentiment Survey. Market observers often view this survey as a contrarian indicator, suggesting that when pessimism prevails among investors, it may signal a favorable time to enter the market.

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Tom Essaye, founder of Sevens Report Research, noted that the decrease in bullish sentiment since November indicates a shift away from the previously prevalent positive bias. However, he cautioned against interpreting this as a definitive signal of market recovery, suggesting that the current sentiment reflects a return to a more "normal" market outlook. Essaye emphasized that a significant increase in bearish sentiment, akin to levels observed during the market lows in October, would be necessary to signal a strong buying opportunity.

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Contrary to individual investors, financial advisers have maintained their bullish stance. The Investors Intelligence Sentiment Index indicated a bull-bear spread of 42% last week, indicating that financial advisers remained "strongly bullish" compared to historical averages. Essaye highlighted this discrepancy, indicating that while individual investors' sentiment has been impacted by recent market movements, financial advisers have remained steadfast in their optimism.

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The recent market turmoil, characterized by a wave of selling in both stocks and bonds, has been attributed to concerns over persistent inflation and hawkish statements from Federal Reserve officials. Additionally, geopolitical tensions in the Middle East have further contributed to market uncertainty. Expectations of a rate cut by policymakers in June have diminished, with traders pricing in a higher likelihood of rate cuts in September or later, according to the CME FedWatch tool.

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Despite attempts at a rebound, with the Nasdaq Composite posting its best day in nearly two weeks, market sentiment remains cautious. Anthony Saglimbene, chief market strategist at Ameriprise Financial, noted that while investors anticipate lower interest rates and higher corporate profits, recent market volatility suggests a potential short-term correction.

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Investors are closely monitoring corporate earnings reports and second-quarter guidance for signs of market direction. Saglimbene emphasized that these results will either fuel further buying or contribute to further market declines, underscoring the ongoing uncertainty in the current market environment.

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