US Stock Market, Retail Investors’ Pessimism;A Positive Signal?

1) What is contrarian analysis of financial markets?

Contrarian analysis is an original way of looking at financial markets, based on market sentiment, particularly the sentiment of retail traders, often considered the “weak hands” of the market. Instead of following the dominant opinion, it assumes that the crowd is often wrong, especially retail investors. Indeed, they tend to react emotionally: buying when everything looks good and selling when everything looks bad.

However, markets rarely behave so obviously. When the majority of retail investors are euphoric and convinced that the rally will continue, it often means most of them have already bought, leaving few potential buyers to push prices higher – and therefore the market top may be near. Conversely, when these same investors are pessimistic, it usually indicates that they have already sold, that the downside potential is limited, and that the market bottom is near.

Applied to US equities, this reasoning becomes particularly interesting. Imagine a steadily rising market, supported by strong corporate earnings and a solid economy. If retail investors remain cautious or worried despite this, it may suggest that the rally is not over. Their skepticism leaves room for additional buying later, which can extend the trend.

In summary, contrarian analysis encourages us to view retail investors’ pessimism as an opportunity rather than a threat. As long as they doubt, the market is probably not at its peak. It is only when optimism becomes widespread that real caution is warranted.

2) According to the AAII, retail investors’ pessimism is near its yearly high regarding US equities
The current sentiment situation is particularly interesting. According to the latest survey by the American Association of Individual Investors (AAII), the percentage of retail investors with bearish expectations has climbed near its yearly high and stands well above its historical average.

Yet, the S&P 500 is trading near its all-time high. According to contrarian analysis, this suggests that the bullish cycle top in the S&P 500 has not yet been reached, since market peaks are always built on retail investors’ euphoria (and troughs on their pessimism).



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