Make or Break - 3 Indicators to Monitor This Week

SmartReversals
04-20

Monday brought the expected bounce; however, the gap-up seen during such uncertainty suggested a prompt fill, which indeed happened later that same day.

Today, significant pessimism pervades the stock market. This analysis will balance this sentiment with price action, given that excessive negative sentiment has often preceded rallies in recent years, including during the 2022 bear market.

Let's examine the average stock exposure reported by the National Association of Active Investment Managers. As shown in the chart below, which starts from 2022, allocations below 30% have historically preceded bear market rallies. For instance, a 6.5% short-lived rally occurred in May 2022, a multi-week 19% rally began in mid-June 2022, and the low allocations in October 2022 and 2023 coincided with market bottoms.

The good news for bulls is that such low allocations have been signals for bounces. Currently, the index is low, but not yet below the 30% threshold seen during those previous turning points.

Examining the expectation for a decline over the next six months, the current pessimism is remarkable and comparable to the past events we've discussed. As the dotted arrows on the chart illustrate, periods where pessimism exceeded 55% have historically coincided with significant bottoms for the S&P 500 $S&P 500(.SPX)$ .

Adding to this sentiment picture, the Fear and Greed index is also currently at an 'extreme fear' level. While it hasn't hit its most recent low of 4, this reading still indicates significantly negative sentiment towards the S&P 500. The chart below highlights the same historical events we discussed earlier, and also includes other periods of extreme index lows, such as in August 2024 during the Carry trade selloff, and recent lows in 2025 that preceded minor bounces.

Based on the three charts presented, conditions appear aligned for a bounce. However, price action is a crucial factor to consider. The bottoms mentioned for 2022, 2023, and 2024 (if including the carry trade selloff) all occurred when price was oversold. In contrast, the bounce this past week has been weak and lacked conviction. This week will be decisive for the stock market considering two aspects:

  1. Bearish sentiment flag that a bounce can be nearby, but not the exact bottom (see in the first two charts, the bottoms in May and June 2022 were days away from the sentiment reading).

  2. Price action lacked conviction for a bounce last week (the long weekend could have affected, but the charts don’t differentiate events).

For whom haven't open CBA can know more from below:

🏦 Open a CBA today and enjoy privileges of up to SGD 20,000 in trading limit with 0 commission. Trade SG, HK, US stocks as well as ETFs unlimitedly!

Find out more here：

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap
Leave a comment
4