Bulls and Bears: Market Optimism vs. Contrarian Indicators in the Record-Breaking 2024 Stock Market
The stock market has witnessed an unprecedented bull run in 2024, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite setting multiple record-high closes. Gold and bitcoin have also experienced surges to all-time highs (News Finder Business’ Before the Bell newsletter subscribers can listen to an audio version of this newsletter by clicking here). The market’s robust performance is underpinned by several indicators reflecting investors’ optimistic sentiment.
1. Market Sentiment Indicators
a) News Finder Fear & Greed Index: Currently in “greed” territory, this indicator gauges seven sentiment barometers, including the VIX index. It measures market sentiment and shows that investors are feeling bullish (News Finder Business’ Before the Bell newsletter subscribers can access this data here).
b) AAII Investor Sentiment Survey: The latest survey reports that 46% of individual investors expect the market to be bullish in the next six months, a significant increase from the historical average of 37.5%.
c) Charles Schwab Trader Sentiment Survey: The survey indicates that 53% of respondents hold a bullish outlook for US stocks, the highest level since the survey’s launch in 2021.
However, these indicators might signal potential trouble ahead. Market sentiment is often viewed as a contrarian indicator, meaning that when the masses are optimistic, money managers may see it as an opportunity for bearish bets. Investors’ decisions can be driven by fear of missing out or a desire to avoid significant losses, leading them to buy at market peaks and sell at troughs.
2. The Bull-Bear Ratio
The Investor’s Intelligence bull-bear ratio is another contrarian indicator that measures the level of optimistic versus pessimistic advisers. The ratio dropped to a cyclical low of 0.57 during the week of October 11, 2023, the lowest reading since the financial crisis. However, following a bullish turn in early November 2023, the ratio has risen to 4.20, the highest reading since December 2017.
3. Economic Data and Market Performance
Despite the optimistic sentiment indicators, stocks have gained on more than just good vibes in 2024. The US economy has remained resilient, with the economy adding 275,000 jobs in February and the Personal Consumption Expenditures price index slowing to its lowest pace in over two years. The Federal Reserve (Fed) has kept interest rates at a 23-year high since last July, but the robust economic data and the recent earnings season have kept the Fed on track to ease rates this year.
4. Producer Price Index (PPI) and Retail Sales Data
A closely watched gauge of US wholesale inflation, the PPI, rose at its fastest pace in months, with energy prices soaring 4.4% from January. The latest PPI data serves as a potential signal for consumer inflation, which could make the process of reining in inflation more arduous. Meanwhile, retail sales rebounded last month with a 0.6% increase from January, fueled by rising gasoline prices and robust spending in various categories.
In conclusion, the stock market has experienced a remarkable run in 2024, with multiple record-high closes across major indices and increased investor optimism. However, several contrarian indicators suggest that caution is warranted, as investors may be buying at market highs and setting themselves up for potential losses. The economic data, including employment figures and inflation indicators, will continue to shape the market’s trajectory in 2024.
