Investor sentiment dived in September. Here's why it's a good sign for stock bulls.

By Jamie Chisholm

Critical information for the U.S. trading day

It's Friday the 13th. Investors will be hoping that doesn't bring bad luck as Wall Street strives to register a full house of positive sessions this week.

After the second start-of-the-month wobble in a row, stocks are back on the front foot, helped in particular by a rebound in some mega technology names and declines in bond yields ahead of the Federal Reserve next week beginning its rate-cutting cycle.

The S&P 500 index SPX has gained 3.46% over just the last four trading days - helped by Nvidia (NVDA) jumping 15.9% over that time - and leaving the main equity barometer just 1.3% shy of its mid-July record high.

All of which, arguably, goes to show the benefit of being alert to contrarian market signals.

That's according to the erudite market observers and data crunchers at Bespoke Investment, who in a new missive noted how the latest rally came even as bullish sentiment supposedly lurched lower.

Bespoke examined the fresh American Association of Individual Investors (AAII) report, a weekly sentiment survey all the more valuable, they say, because it's been running for more than 35 years.

Bespoke noted that after moving above 50% per cent recently, this week's AAII Bullish Sentiment reading dropped sharply to 39.8% as respondents became more wary.

Next, they looked at the rolling 52-week average of AAII Bullish Sentiment, "which provides a more smoothed-out, longer-term look at the reading."

What this second chart shows is that individual investors were the least bullish ever toward the end of 2022 and early 2023, just when the savage equity bear market was turning the corner into the current bull market.

"In hindsight, that low in sentiment was actually the best time for investors to be bullish given how well the market has done since then," says Bespoke. "This is the reason why sentiment readings are considered contrarian indicators. Investors more often than not tend to be too bullish when the market is flying high and too bearish when the market is selling off," they add.

And we can take this a stage further. The final chart shows the historical spread between AAII's Bullish and Bearish sentiment readings by monthly, where a more positive showing means that over the years investors have been more bullish, and a lower outcome shows investors were less bullish.

As we can see, September has historically provided the most meager average bull-bear sentiment spread over the years. "This shouldn't come as a surprise given that September has historically been the worst month of the year for the stock market, but it once again highlights the contrarian nature of investor sentiment," says Bespoke.

However, though September is a bad month, it leads into the fourth quarter, which is historically the strongest period of the year.

"Given that the market has risen consistently over time, September weakness should be viewed as an attractive time to add equity exposure, not a time to turn more bearish," Bespoke concludes.

Markets

U.S. stock-indices SPX DJIA COMP have mostly opened little changed as benchmark Treasury yields BX:TMUBMUSD10Y fall. The U.S. dollar index DXY is down, while oil prices (CL.1) rally and gold (BTCUSD) is trading around $2,576 an ounce.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5595.76    1.68%  0.95%   17.32%  24.21% 
   Nasdaq Composite                                                     17,569.68  2.58%  -0.14%  17.04%  26.16% 
   10-year Treasury                                                     3.65       -6.30  -23.50  -23.09  -68.14 
   Gold                                                                 2599.1     2.86%  2.08%   25.45%  33.59% 
   Oil                                                                  69.79      2.39%  -7.55%  -2.16%  -23.48% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

The preliminary reading of U.S. consumer sentiment will be released at 10:00 a.m. Eastern.

Boeing shares (BA) are down about 3% after union members voted to go on strike and reject a tentative contract that would have increased wages by 25% over four years.

Adobe stock (ADBE) is off 8% after the software company forecast lower-than-expected revenue for the current quarter.

Shares of RH (RH) are up nearly 19% after the retailer said it continues to see healthy demand for its furniture and home furnishings, and reported a quarterly earnings beat.

The Chinese government said it would gradually raise the retirement age, the first time since 1978, taking men from 60 to 63, white collar women from 55 to 58, and blue-collar women from 50 to 55.

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The chart

Keep an eye on the Japanese yen as it threatens to strengthen to less than 140 per dollar for the first time since July 2023, a move that may trigger additional dumping of carry-trade positions. Nervous investors may recall that a surging yen has sometimes of late coincided with stock market tremors.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   DJT     Trump Media & Technology 
   NIO     Nio 
   AAPL    Apple 
   PLTR    Palantir Technologies 
   TNON    Tenon Medical 
   TSM     Taiwan Semiconductor Manufacturing 
   AMD     Advanced Micro Devices 

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-Jamie Chisholm

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09-13-24 0931ET

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