Stock market investors are “scared” amid worst bearish sentiment since 2009, BofA says

Fear is mounting in stock markets, with individual investors the most pessimistic since 2009, according to BofA Global Research.

“Individual investors are afraid,” Stephen Suttmeier, technical research strategist at BofA, said in a statement April 29. A bearish sentiment gauge from the American Association of Individual Investors has “a capitulation reading of 59.4%, the highest since March 2009,” or around the time the stock market bottomed amid the global financial crisis, the note shows.


An ugly April for the US stock market compounded this year’s losses for key benchmarks as investors worry about rising inflation and interest rates. The Cboe volatility index VIX,
was high at more than 35 as of Monday afternoon, well above its 200-day moving average of around 21.6, FactSet data at the last check showed.

While bearish sentiment could lead some investors to believe the S&P 500 is “recovering,” Suttmeier warned in the BofA report that indicators such as weakening credit market indexes suggest it may make new lows of around 3,800-4,000 this year.

“This suggests that all rallies should be sold,” he said in the report.

The S&P 500 SPX,
was down about 1.4% on Monday afternoon after entering corrective territory for the second time in 2022 on Friday, when it closed at 4,131.93, according to Dow Jones Market Data.

A correction is generally defined as a pullback of at least 10% – but no more than 20% – from a recent high. An exit from this area occurs after a rise of at least 10% from a correction low.

The S&P 500 and Dow Jones Industrial Average also posted their worst April performances since 1970, while the tech-heavy Nasdaq Composite COMP,
had its ugliest April since 2000, the year the dot-com bubble burst.

The bond market has also suffered this year.

Shares of iShares iBoxx $ High Yield Corporate Bond ETF HYG,
and iShares iBoxx $ Investment Grade Corporate Bond ETF LQD,
were down in afternoon trade Monday, FactSet data showed at last check. The share price of iShares iBoxx $ High Yield Corporate Bond ETF fell 4.6% in April, while iShares iBoxx $ Investment Grade Corporate Bond ETF fell 6.9%, FactSet data shows.

Read: Why high-yield ETF outflows made this Jefferies strategist “a little nervous.”

Meanwhile, spreads in the junk bond market widened over the past month, according to ICE BofA US High Yield Index Options-Adjusted Spread data, cited on the US High Yield Index website Federal Reserve Bank of St Louis. High yield bond spreads were nearly 4 percentage points over comparable government bonds at the end of April, compared to around 3 percentage points in early 2022, the data shows.

“Investors are not used to seeing dramatic losses in their bond portfolios, especially when equity markets are also falling sharply,” said Saira Malik, Nuveen’s chief investment officer. in a note Monday. “We don’t expect such simultaneous sell-offs to become the norm, but less predictable correlations could become more common as the Fed continues with its policy normalization and liquidity conditions tighten.”

The Federal Reserve aims to combat high inflation by tightening monetary policy this year by raising interest rates and reducing its massive balance sheet. Investors are expecting the central bank to announce another rate hike after the conclusion of its two-day monetary policy meeting on Wednesday.

Read: Goodbye TINA? Why stock market investors can’t afford to ignore rising real yields.

“Bulls among retail investors have become an endangered species,” said Suttmeier of BofA. Stock market investors are “scared” amid worst bearish sentiment since 2009, BofA says

Brian Lowry

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