$SPX Sentiment Reset Signals Near-Term Bottom, But Downside Risk Remains
$S&P 500(.SPX)$
This week’s chart presents an unusual sentiment indicator which serves a specific purpose to a specific type of market participant.
This composite indicator takes into account sentiment readings from surveys + market metrics: the $Cboe Volatility Index(VIX)$ (volatility/fear gauge) and the forward PE ratio (being ultimately a measure of investor confidence).
The inputs are also smoothed so that it provides the most useful signal to longer-term active investors who are less fixated on the day-to-day news/noise.
We’ve seen a significant reset in this indicator already.
This says we are close to a major market bottom.
However we still need to respect risk. The direction of travel (bearish momentum) from previously euphoric levels of sentiment does suggest caution, and the highest conviction bottoming signals historically came only once it reached or breached the zero-line (like it did in recent years during 2016, 2018, 2020, and 2022).
So it’s a key chart to have on the radar because even with today’s news (Trump comments on unilaterally finishing the War) and the enthusiastic rebound in stocks, it’s entirely possible that we still see another leg down before this episode is all done and over with given the various moving parts and lingering issues.
Bottom line: longer-term measures of investor sentiment have seen a major reset already (albeit are yet to approach levels seen around major market bottoms).
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