As the S&P 500 hovers around its highest levels on record and investors pile into riskier stocks, market sentiment signals “excessive optimism,” according to Ned Davis Research analyst London Stockton. That could leave the market vulnerable to a pullback.
The S&P 500 was up 0.6% and on track to build on yesterday’s record close. It also set another intraday record high. The Nasdaq Composite was up 0.3%, a tick below its record from Monday. The Dow was up 415 points, or 0.9%, moving within a few hundred points of its Dec. 4 record.
The market is in the midst of a second-quarter earnings season with stocks sporting ballooning valuations; Texas Instruments was the latest firm to see shares fall sharply amid concerns from investors about the impacts of tariffs. Alphabet and Tesla will kick off Magnificent Seven earnings after the close.
More than just records for key AI stocks, another sign of market froth is the resurgence of cryptos and meme stocks in recent weeks.
Stockton, of Ned Davis Research, writes that his firm’s “Fab Five Sentiment Component” has been relatively bearish for much of the current cyclical bull market.
“Short-term sentiment has been quick to rebound to optimism, and valuations have remained high over this period,” he writes. “Despite this, the overall Fab Five has been more positive with the Tape and Monetary Components overriding with more bullish readings. The Fab Five is currently neutral.”
Stockton adds that while many of their sentiment composites and indicators give a bearish reading when optimism is excessively high and the inverse when pessimism is excessively high, that doesn’t mean you should bet everything on a pullback now.
“In many cases, it is better to go with the flow until sentiment reaches an extreme and then begins to reverse,” he writes. “At that point, it pays to be contrary.”
With hard numbers due out in the days and weeks ahead that could test a market that’s priced for perfection, it’s worth keeping on your toes.