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How much will bearish US sentiment impact indices?

The climbing of a wall of worry described the start of the bull trend following the great financial crash. The bull trend became the most hated market of all time as investors couldn’t understand why the markets refused to drop, considering all of the money printing and zombie companies being supported by QE. We finally got a good clear out in 2020 but again the Fed and US treasury stepped in to save the markets. In 2022 however, the talk is of removing that help and the markets are now considering a recession led by the Fed’s change in monetary policy.

Weekly Indices Analysis

Bullish readings in the American Association of Individual Investors (AAII) sentiment report are at the lowest level it has been for some time and in standard deviation terms, are below -2, which hasn’t been seen since the early 1990s. The markets are nothing like they were in 2020 when there were limited down days and the sentiment was cratering as volatility went through the roof. This market is a more considered bear market, which means it will either last for a long time, or there is once again going to be a massive wealth transfer from the average investor to the institutional investors. Ukraine v’s Russia, high inflation, high energy prices, China lockdowns due to continued rises in COVID outbreaks, rate hike cycles and quantitative tightening (QT) are weighing on the consumer and investors alike.

The Russell 2000 small-cap index has led the large-cap indices lower and continues to press downwards. The S&P500 and Dow Jones Industrial Average were the most reluctant to drop as companies within these benchmark indices were doing well in the inflationary environment. The forward-looking statements from most companies during earnings season are one of worsening economic conditions, and the market is now trying to price in the Fed causing a recession.

The S&P500 is certainly looking to close out April with the worst monthly decline since 2020 as only 40% of companies within the index are currently trading above their 200-period daily moving average. Market-leading stocks like Apple are reporting today with the market expecting a share buyback program of around $90bilion. Last night Facebook's parent company Meta revealed that there was a return to growth in users of the social platform and that revenue had jumped by 6.6% to $27.9billion. In February 2022, the shock was when Meta announces a decline in users. This reversal in user trends has sent the company’s shares higher in pre-trading hours and could help support the index whilst we await Apple's earnings report. Another good news story came from the second largest company in the S&P500, Microsoft, whose shares are up 1.4% premarket, adding to a 4.8% surge yesterday. The technology giant posted higher fiscal Q3 results and received several price target revisions by market analysts.

The daily chart of the S&P500 is showing the index is in a bearish correction, having been in a trading channel that broke to the downside. There is also the distinct possibility that the price action backfills sufficiently to retest the broken downward sloping trend line, to confirm some support and demand are present and acting as a price floor. If the price were to come lower from any day onwards, the retest of that trendline would send the price below the most significant swing lows this year and signal a high probability of continuation to the downside. Whilst the index is below the 200-period average I find it hard to be bullish and I certainly don’t want to be holding a long if the market were to collapse. Like it did in February 2020. I’d rather show patience and wait for a higher high and higher low, or trade with the current momentum.

As the Russell 2000 led us into this market, maybe it will signal when the rout is over.

My current thoughts on that though are that we have seen a backfill of the trend line and we have removed liquidity below the swing lows. This means, that if we go lower than yesterday’s low point, there is no reason to be looking for a buy and we should be considered a classic retest, breakout, and continuation trades. All the way down to 1650 and the next significant market structure.

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