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Strategists argue the last holdouts amid the stock-market comeback are Democrats. Shown: Sen. Bernie Sanders, a Vermont independent and Rep. Alexandria Ocasio-Cortez, a Democrat from New York. PHOTO: MARIO TAMA/GETTY IMAGES |
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The S&P 500, basking in the glow of record recovery from April's lows, could be ready to establish a new landmark on Wednesday as a holiday-shortened week winds down. |
During the last 60 years, a more than 20% gain for the S&P 500 SPX in a two-month time period has happened only six other times, Pat Tschosik chief thematic strategist and London Stockton, analyst at Ned Davis Research, told clients in a new note. |
Despite this impressive performance, the pair sense a lack of investor wow-factor out there, likely due to some remaining pessimists. In our call of the day, Tschosik and Stockton say those bearish holdouts — they point the finger at investors who are Democrats — could open the door to another rally when they finally capitulate. |
Backing up a bit, the Ned Davis team went digging around to figure out what was going on with investor sentiment, looking at several surveys and gauges. They started with their own daily trading sentiment composite, which is a 0-to-100 measure combining different sentiment, asset flow, valuation and other readings. Dating back to 1975, the gauge moved above 70 during similar 20% jumps in two months for the S&P 500, except during the pandemic. |
That gauge, however, rose to just 62.2 after the S&P 500's recent 20.5% move. Tschosik and Stockton said that shows "we started from a very low level of pessimism and that a meaningful amount of pessimism remains." They added that this sentiment gauge hasn't been in the zone of excessive optimism for more than two days since Dec. 10. |
In addition, their crowd sentiment poll has been in neutral territory for the past couple of months, and is below its 10-year average. |
The pair then looked at a sampling of other surveys such as the Commodity Futures Trading Commission's survey of commercial futures traders, investment newsletter editors and individual traders. They compared current readings on those surveys to their 10-year averages. |
Standing out was the American Association of Individual Investors survey that showed just 24.7% bulls as of mid-March, said Tschosik and Stockton. While the number of bullish investors rebounded by May, they conclude that this group of investors is more bearish than other surveys they tracked, with a calculated bull reading of 46.8%. |
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"The good news for bulls is that it leaves room for the market to go higher as these bears are converted into bulls. The S&P 500 has returned 10.8% annually when bulls are below 59.5%," they said. |
That brings us to the pair's sleuthing over the source of those bear holdouts. Tschosik and Stockton looked at consumer sentiment by political party, which showed a sharp plunge for Democrats. "The current sentiment reading for Democrats is not only its lowest level since 2017, it is the lowest level relative to Republicans," they said. |
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Gloomy investors are Democrats? CHART: NED DAVIS RESEARCH |
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Whether too-negative Dems or too-positive Republicans are in the right when it comes to markets remains to be seen, they say, given the second half of the year offers reasons to be cautious. |
But add those low levels of sentiment to other indicators they are watching such as breadth thrusts — a bullish technical signal for stocks — the pair believe "Democrat investor capitulation could fuel the next up-leg of the market." |
Incidentally, a new Gallup Poll — conducted before the recent record highs — showed that 60% of investors are worried about stock-market volatility. Party identification plays out here as well, with 48% of Democrats surveyed "very concerned" about recent market ups and downs, versus just 9% of Republican investors. |
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The markets |
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| Key asset performance | Last | 5d | 1m | YTD |
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S&P 500 | 6198.01 | 1.74% | 3.81% | 5.38% | Nasdaq Composite | 20,202.89 | 1.46% | 4.14% | 4.62% | 10-year Treasury | 4.25 | -4.20 | -10.90 | -32.60 | Gold | 3350 | 0.34% | -0.80% | 26.93% | Oil | 65.48 | 0.72% | 3.38% | -8.89% | Data: MarketWatch. Treasury yields change expressed in basis points |
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Earnings per share revisions for the S&P 500 back to COVID-highs, in line with high-water marks of the past. CHART: RBC CAPITAL MARKETS |
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Among niggling worries about stocks is this chart from RBC Capital Markets, which shows the rate of upward earnings per share estimate revisions for the S&P 500 are back to post-COVID/non-crisis rebound highs. That's making a team led by Lori Calvasina, head of U.S. equity strategy, "wonder if this is as good as it gets for 2025 earnings." Other worries for stocks include stalled bitcoin prices, as they've moved in sync with the S&P 500, she said in a note. |
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