- Investors’ fears of missing out on the current stock market rally could lead to further gains, according to Ned Davis Research.
- Sentiment indicators continue to show moderate bullishness among investors.
- “Large hedge funds and asset managers remain bearish, suggesting pain trading could be higher,” NDR said.
According to a note from Ned Davis Research, current sentiment indicators show that investors’ fears of missing out on the current stock market rally could drive further gains.
The research firm stressed that the internal public opinion poll, which dropped to bearish levels not seen since December 2018 and early 2016 in mid-June, has partially recovered but is still far from overly optimistic.
Other sentiment indicators show similar findings, with CNN’s Fear & Greed Index currently in neutral territory, and the most recent AAII Investor Sentiment Survey showing that only 33% of respondents are optimistic, well below the historical average of 38% .
“Short-term sentiment has recovered, but medium-term sentiment suggests that the fear of missing out (FOMO) could continue to motivate traders,” NDR said.
That’s because bearish investors had plenty of opportunities earlier this year to position their portfolios to have little equity exposure as concerns grew that the Federal Reserve would send the economy into recession by raising interest rates to tame inflation.
But as it now looks increasingly likely that the economy will make a soft landing, it will be some time before bearish investors admit defeat and reposition their portfolios toward equities, creating more buying pressure later on.
“Large hedge funds and asset managers remain bearishly positioned, suggesting pain trading could be higher if major investors are forced to cover their shorts,” NDR said.
The combination of investor FOMO, improving macro data in the form of better-than-expected second-quarter earnings results, and optimistic technical data means the stock market rally could continue for several more weeks.
“Overall, technical broadening has continued to follow the typical behavior of an early bull market,” NDR said, highlighting the bullish technicalities it sees in the stock market.
Adding the FOMO sentiment could allow the rally to continue for several more weeks. At that point, if there is no light at the end of the macro/fundamental tunnel, the market may be at risk of another downward move. broadening and/or improving macro conditions, we will try to add equity exposure,” NDR said.