The S&P 500 is less than 3% away from a new all-time closing high.
But when you zoom out, the index is sitting at roughly the same level it was five months ago.
In other words, the benchmark for U.S. equities has gone nowhere for months. And that kind of environment can be just as frustrating for investors as an actual decline.
Years ago, Brian Shannon shared a line with me that stuck: “If they don’t scare you out, they’ll wear you out.”
Sometimes markets fall fast and shake people out. Other times they just chop sideways long enough to exhaust everyone.
That second scenario looks exactly like what we’re seeing today.
After months of choppy action, investor sentiment has suddenly taken a sharp turn toward fear. Bearish readings among individual investors spiked this week, and hedge funds are leaning aggressively short as well.
So the question is simple.
If the market is sitting just a few percent below record highs, why is everyone so scared?
Let’s take a look.
Investors Are Scared: Pro-Am Edition
The American Association of Individual Investors (AAII) releases its sentiment survey every Thursday morning.
This week’s report really jumped off the page. Nearly half of individual investors say they are bearish on stocks over the next six months:
That makes four consecutive weeks with more bears than bulls, with a major spike in pessimism in the latest reading from the AAII.
Of course, individual investors can be emotional and quick to change their minds. That volatility tends to show up in surveys like this.
So it helps to look at what the professionals are doing as well.
According to Goldman Sachs, hedge funds are currently carrying their largest short exposure since the end of the 2022 bear market, right before one of the most historic rallies in a generation:
The last time hedge funds were this short, the Nasdaq doubled.
Back then economists were guaranteeing a recession. We’re still waiting for it…
So when you step back and look at both sides of the market, the picture becomes pretty clear.
Individual investors are bearish. Hedge funds are heavily short. And that brings us to the real question.
What tends to happen when everyone is leaning the same way at the same time?
Sentiment as a Tailwind
When everyone is bullish but fewer and fewer stocks are participating to the upside, that’s usually a recipe for a correction. Sometimes worse.
But when everyone is bearish while the majority of stocks refuse to go down, that’s often a recipe for higher prices.
That’s how markets work.
Markets don’t peak when everyone is bearish. Just like markets don’t bottom when everyone is bullish.
Asset prices aren’t driven by “fundamentals” in the way most people think.
They are driven by positioning. They’re driven by sentiment. They’re driven by millions of investors adjusting their allocations at the same time.
That’s why we spend so much time looking for places where the crowd is leaning the wrong way.
In fact, that is exactly why this report is called Everybody’s Wrong.
Because at any given moment, everybody is wrong about something somewhere. Our job is simply to find it.
Right now the S&P 500 is less than 3% from the highest close in history.
At the same time, individual investors are the most bearish they have been since early November, which was the last time the market put in a major low and ripped higher.
Meanwhile, hedge funds are carrying their largest short exposure since the end of the last bear market. The same setup that preceded one of the most powerful rallies in a generation.
If stocks were breaking down, that pessimism might make sense.
But they’re not.
And when prices are holding near all-time highs while investors are this scared, that kind of pessimism has a funny way of turning into buying pressure.
I like that combination.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs