Investor sentiment and bullish “chasing” has been a notable part of the 2024 rally. But despite an almost universally bullish outlook from analysts and investors, sentiment, while bullish, is not yet at levels that would imply the rally is almost exhausted, advises Jim woods, editor of Successful Investing.

Clearly sentiment has improved since late April as stocks recently rebounded to new all-time highs and expectations for inflation (declining again) and the Fed (September rate cut) have improved. But bullish sentiment remains below the highs of the year and while investors and advisors are optimistic and bullish, they are not so wildly bullish that it’s a major, short-term red flag.

The CNN Fear/Greed Indicator recently sat at 61 (on a scale of 0-100). That’s slightly in the “Greed” zone. The Fear/Greed Index has become more widely followed on the Street because it incorporates seven different momentum and sentiment indicators and, as such, provides a wide view of current investor and market sentiment.

The 61 reading puts this indicator slightly in the “Greed” zone but not at a level that would make us nervous for the rally. The “Neutral” range is from 50-59 so while sentiment is technically bullish, it’s barely so and far from the 78 “Extreme Greed” reading we saw back in February.

The AAII Investor Sentiment Survey recently showed 41% bulls. That’s just slightly higher than historical averages. This survey asks respondents (individual investors) whether their outlook is bullish or bearish and the percentage of respondents that say they’re bullish, bearish, or neutral is tracked over time. The historical average for bulls is 37.5%, so at the 41% reading last week, we’re close to that level and only slightly bullish.

The more interesting number is the bearish reading, which is at a very low 23%. That's well below the 31% historical average and only slightly above the 22% low we saw in late March. This speaks to the “complacency” that I believe leaves this market vulnerable to negative surprises.

The Investors Intelligence Advisor Sentiment Survey recently had a Bulls/Bears spread of 42%, a Bullish reading. The Investors Intelligence Advisor Sentiment Index is similar to the AAII survey, but it polls financial advisors, not individual investors. It’s also referenced slightly differently as a spread of bulls/bears as opposed to percentages of each versus a benchmark.

Regardless of the methodology, the message is the same: Advisors remain very bullish. At 42%, that difference between bullish respondents and bearish respondents shows financial advisors are strongly bullish compared to the 30% historical average.

Bottom line, investor and advisor sentiment shows they are complacent about the path higher for stocks. But they are not so overtly bullish that it warns of a negative tipping point. Instead, there is some additional room for this rally if news stays positive near term before sentiment gets so bullish it’s a warning sign.

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