Are We Getting A Sentiment Set Up Similar to Spring Of 2025?
1.) METALS – Gold and Silver don’t like the fact that 1.) 2YR Yields are pushing higher on the continued acceleration of inflation data (post here), and 2.) that the yield curve continued lower yesterday, down to 0.18% overnight. That said, the yield curve is currently very “oversold”, which means it would not be surprising to see the yield curve push up some from here. Gold is in more of a neutral position, bumping up and down inside trend range, which is $4,255 to $4,385. If the yield curve starts to improve, gold should start to pick up some as well. If not, then we could see gold break below the trend low and test it’s near term break out of the $4,100 area. Silver looks a tad better in that it is holding above the top of its trend range, which is $64.50. But neither gold or silver are in an overbought or oversold condition, so I’d have to call them both, for now, neutral. Much will depend on what happens with the yield curve and the US Dollar. Currently the US Dollar is strengthening…which gold doesn’t like that either since it has a -0.39 inverse correlation to the US Dollar. But right now, much of the strength in the Dollar Index (DXY) is coming from Euro weakness. It’s good to remember that the DXY isn’t a “pure” look at the US Dollar, but rather a measurement of the dollar against a fixed basket of six currencies. If the Euro is weak, it would help push the DXY higher without the Dollar itself doing much. The Dollar just broke above trend, so it would not be surprising to see it push higher, maybe testing that $101.50 area.
2.) SENTIMENT – Sentiment…how people “feel” about markets…is always interesting. According to the latest AAII Sentiment Survey, 53% of individual investors expect stocks to fall over the next six months and only 28% expect them to rise. You have to go all the way back to the spring of 2025 to find investors this pessimistic. Remember that? Back then, investors were worried about tariffs, the economy, interest rates and just about everything else they could find to worry about. And then stocks took off on a powerful rally. So here we are again, with sentiment conditions similar to then and bullish sentiment near its lowest levels in more than a year. If all you got to see were sentiment numbers the average person would likely think the market is in bad shape and would be afraid to invest. Good. We need that “Wall of Worry” for a healthy market. Don’t listen to what people say the market should be doing. Look at what the market is actually doing. Remember that scary chart I showed you some time ago that was going around comparing margin debt with GDP? The argument was that investors were borrowing too much money to buy stocks, especially compared with the size of the economy, and therefore something bad was coming. Remember, stocks are not GDP. This may sound strange, but the stock market and the economy are two different things. If the S&P 500 were near all-time highs and everybody was wildly bullish, that would be a very different setup. I’d be wary and careful. That’s not what we have. We have stocks near highs while more than half of the individual investors surveyed think they’re going down. That’s a lot of people who can change their minds! Historically, unusually high bearish readings in the AAII survey have been associated with better-than-average stock market returns over the following six and 12 months. So when I see the most bearish sentiment since the spring of 2025, right before one of the most powerful stock market rallies we’ve seen in years, while stocks are sitting roughly 2% from record highs, I don’t see all that pessimism as a headwind.
3.) SEASONALITY – For those of you who have followed my writing for a while, you know that the “season” we are in with respect to the calendar is not something that we feel drives markets. However, it’s also not something to completely ignore either. Interestingly, October has been the best month in midterm years historically and November the second best. That certainly goes against what many people think of October. Given this historical data along with the current sentiment and positioning, we wouldn't be surprised to see some more early buying ahead of those coming months. So far September has been better than average.
