The Herd Is Wrong Again

Why is everyone so bearish!?!

I don't blame you if you're feeling a bit down right now.

The thought alone of inflation is exhausting. And the uncertainty circling fiscal policies is too much after a four-year spending spree.

You can add January’s hot CPI print to the laundry list of negative news unable to deter this bull market. DeepSeek, tariffs, the shock and awe of Trump’s administration…

Nothing can keep investors from buying every dip.

In fact, selling pressure lasted only a few hours following the recent inflation data. And despite an initial knee-jerk reaction lower, the Nasdaq 100 finished the session green.

Every time it appears the market will lurch lower based on news or economic data, buyers swoop in and save the day.

As a result, the averages continue to constructively coil near their highs, frustrating every bear on the block.

In these messy, noisy market environments, it’s critically important to stay as objective as possible when making your trading decisions.

It’s not easy! But if you stick to the data, you’ll have a much better chance of surviving (and thriving!) when the market moves against the herd.

So before you rush to sell stocks, understand the market is entering a seasonally weak patch. Fear is speaking more to opportunity than to any real danger. And the market is trading a stone’s throw away from new all-time highs… 

Brace for Seasonal “Air Pockets” Ahead

Selling pressure isn’t coming out of nowhere. Plenty of real concerns exist and the back half of February tends to be bumpy.

After enjoying a seasonally favorable start to the year, the S&P 500 ETF (SPY), on average since 1994, drops a percentage point during the final two weeks of the month.

The Nasdaq 100 fares even worse, averaging a 0.28% loss on the month. In fact, the large-cap tech index is halfway through its third weakest month of the year, behind September and December. 

Don’t be surprised if you run into dicey conditions today. As the saying goes, either go short or stay away the day before President’s Day.

So expect some turbulence, and do whatever it takes to calm your nerves — breathe into a paper bag, recite a mantra, or simply turn off your screen. Personally, I like to go for a walk.

But at the end of the day, sticking with the facts and not falling victim to irrational fears is all that matters.

I know it’s not easy as retail investors continue to sell out.

Bears Bring Opportunity

Despite a resilient market, investors are getting more bearish by the day.

The latest sentiment survey from the American Association of Individual Investors (AAII) shows pessimism increased once again this week. In fact, we’ve seen more weeks with AAII bears outnumbering bulls this year than all of 2024.

On the flip side, bullish sentiment is below its historical average for the fifth time in seven weeks, AAII notes, while bearish sentiment increased by more than 4% week over week to 47.3%. In other words, nearly half of all survey responses are now leaning bearish.

More importantly, bearish sentiment has not been this high since Nov. 2, 2023.

Check out the chart of the S&P 500 with the percentage of AAII Bears (red line in the lower pane) courtesy of MacroCharts.

The percentage of retail investors reporting a bearish outlook is hitting levels of past inflection points in the uptrend.

Most recently, sentiment registered similar readings at the March and October bottoms in 2023. But as you can see, AAII bears also ticked the 2016 and 2018 lows.

Now is not the time to be bearish. That side of the boat is already full.

Instead, the uptick in bearish sentiment signals opportunity. Investors caught on the wrong side will begin chasing the uptrend once new all-time highs dot the charts again. Price has a funny way of adjusting sentiment. 

Meanwhile, the bears are obviously not paying attention. If I had to guess, the herd must be choosing the new cycle over the charts, completely unaware the media is leading them to slaughter.

Price Doesn’t Lie: New Highs Are Within Reach

At the risk of sounding like a broken record, none of this actually matters until we see market conditions change.

The situation is clear…

We’re looking at a market that’s threatening to post new highs — possibly as early as today as the S&P 500 is just 0.1% (less than 4 points) from its highest recorded close.

If you’re keeping track at home, we’re also seeing broadening participation and an unrelenting bid beneath the market. No matter what, I don’t see a reason to fight this tape until something breaks