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- Three popular investor sentiment gauges are indicating that investors have no conviction in where the stock market will go from here.
- The Citi Panic/Euphoria Model, the CNN Fear & Green Index, and the BofA Bull/Bear indicator are all flashing contradictory readings.
- The three indicators all dropped sharply amid the market sell-off in February and March, but since then have diverged as the market rallied nearly 40%.
- Visit Business Insider’s homepage for more stories.
Investors have no conviction in where the stock market will go from here, according to three diverging investor sentiment indicators.
Investor sentiment indicators use a range of different market-related inputs in an attempt to gauge how investors feel towards stocks at any given time.
These sentiment readings are often used by investors as contrarian buy or sell signals.
When a majority of investors are bullish on stocks, contrarians view that as a signal to sell stocks.
Alternatively, when a majority of investors are bearish on stocks, contrarians view that as a signal to buy stocks.
The thinking surrounding contrarian trading is that markets often do the opposite of what everyone thinks they will do.
So when a sentiment indicator identifies what a majority of investors think stocks will do, do the opposite, contrarians say.
Currently, the Citi Panic/Euphoria Model, the CNN Fear & Green Index, and the BofA Bull/Bear indicator are all flashing contradictory readings.
After falling in sync amid the February-March market sell-off, the three indicators have since diverged as the stock market rallied nearly 40% from the March 23 lows.
Bank of America
The Bank of America Bull/Bear indicator has been stuck in bearish territory for weeks, flashing a 0.0 out of 10 as of last week.
This signifies that investors are extremely bearish on stocks, which generates a contrarian buy signal.
Meanwhile, the CNN Fear & Greed Index has been stuck in neutral territory for a month, and registered a reading of 52 on Monday.
This signifies that investors are undecided on stocks right now, which doesn’t generate a contrarian trade signal.
Lastly, the Citi Panic/Euphoria Model is now generating a reading of “euphoria,” after rallying from a reading of “panic” in April.
This signifies that investors are bullish on stocks right now, and generates a contrarian sell signal.
When taken together, the three divergent readings in the sentiment indicators signal that investors have no conviction in where the stock market goes from here.
Investors seem baffled by the fact that the stock market has rallied so much in the face of bad news and devastating economic numbers caused by the coronavirus pandemic.
More than 40 million Americans have filed for unemployment benefits over the past 10 weeks, and the market rallied on 9 out of the 10 days when the unemployment data was released.
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And today, to the surprise of many, the stock market is up despite violent protests and riots over the weekend that spread to large cities around the world in the aftermath of the death of George Floyd.
One potential outcome of a stock market where investors have little conviction in where it goes from here is a sideways market that trades range-bound to digest its recent gains before breaking higher or lower.
Read more: Famed economist David Rosenberg says investors are falling into a classic market trap that’s historically preceded a further meltdown — and warns ‘there’s not going to be much of a recovery’
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