Whereas the S&P 500 and Nasdaq skilled a good upside bounce this week, they nonetheless stay down 3.2% and 4.4% respectively for the month of August. A fast evaluate of market sentiment indicators tells me that additional draw back is more likely earlier than a sustainable restoration turns into an actual risk.

VIX Alerts Excessive Volatility

The VIX hit 65 on an intraday foundation this week, representing the third highest studying for the reason that Nice Monetary Disaster in 2008. The truth is, the indicator has solely pushed above 40 a handful of instances within the final ten years, often throughout a big corrective interval.

Whereas there’s loads of debate about how 0DTE choices have impacted this traditional sentiment gauge, it is price noting that any spike within the VIX has nearly all the time coincided with weaker worth motion, at the least within the short-term. So so long as the VIX stays above 20, buyers ought to brace for a loud tape and, most probably, additional deterioration for fairness indexes.

AAII Survey Reveals Bulls Nonetheless Outnumber Bears

Our second indicator makes use of the weekly survey outcomes from members of the American Affiliation of Particular person Buyers (AAII). I are likely to search for two foremost indicators right here, the primary being a bullish studying of over 50%. The chart exhibits how this occurred in early July.

Now a excessive bullish studying by itself simply represents excessive optimism, nevertheless it additionally tells me to search for indicators of a bearish rotation. Within the final three weeks, we have seen the bullish p.c come right down to round 41%, whereas the bearish studying has elevated to above 38%. As the underside panel exhibits, the final time that bears outnumbered bulls within the survey was on the April market low. You may additionally discover that extra protracted market declines additionally began with a rotation from bullish to bearish sentiment. This chart tells me to contemplate the market “responsible till confirmed harmless”, particularly if the survey outcomes present a better bearish studying within the coming weeks.

NAAIM Publicity Index Confirms Defensive Rotation

What in regards to the “sensible cash” as represented by cash managers? The NAAIM Publicity Index exhibits the outcomes of a weekly survey of the Nationwide Affiliation of Energetic Funding Managers, with the quantity representing a median allocation to equities of their consumer portfolios. When the indicator is above 100%, because it was in late June, it suggests a euphoric studying and a better chance of corrective market motion.

It is price noting right here that the NAAIM Publicity Index was pushing decrease in early July, whereas the AAII survey was nonetheless studying a really excessive stage of bullishness. This means that the “sensible cash” was already lightening up fairness publicity earlier than the market decline actually started to speed up. Now, we see the indicator has come right down to round 75%, confirming that cash managers on this survey are discovering elsewhere to park their capital to climate this era of market turbulence.

I take into account an evaluation of worth motion as an important piece of a well-defined technical evaluation course of. However I additionally really feel that market sentiment indicators can present a wonderful window into the mindset of different buyers, serving to to make clear when excessive optimism or pessimism could also be taking maintain. This evaluation of three remark sentiment indicators exhibits exceptional similarities to earlier bear phases, and tells me to brace for a possible additional decline for shares.

RR#6,

Dave

P.S. Able to improve your funding course of? Try my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your personal private and monetary scenario, or with out consulting a monetary skilled.

The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer and don’t in any method characterize the views or opinions of every other particular person or entity.