Key Takeaway: Speculative excesses have been unwinding for a year and that has taken its toll on investor sentiment. The overall mood is characterized by a lack of optimism rather than rampant pessimism. This is consistent with the grind lower in many areas of the market since new highs peaked in February 2021. The damage done beneath the surface has only in recent months impacted the indexes, but if that impact intensifies a further expansion in pessimism would not be surprising. Benchmark 60/40 portfolios have gotten off to their worst start in a quarter century and our strategic positioning indicators continue to point to a high risk backdrop. If there isn’t much of a reward at the end of the volatility rollercoaster, passive participants may start to actively question whether the ride was worth it.          

Sentiment Report Chart of the Week: Unwind Continues

While the popular averages peaked more recently, there is plenty of evidence to suggest we are now a year into an unwind in speculative activity. This time last year, more than a quarter of the issues on the NYSE+NASDAQ were hitting new highs (the peak for the cycle) and NASDAQ trading volume was 150% higher than it had been the year prior. Fast forward to this year and we see half of the stocks on the NYSE and three-quarters of the stocks on the NASDAQ are down 20% or more from their highs (nearly half of the stocks on the NASDAQ have been cut in half). NASDAQ trading volume is 20% (and falling) lower than it was a year ago. Sentiment is sour and the risk appetite unwind continues. The question isn’t whether US stocks are going to enter a new bear market, but when they will emerge from the one that many find themselves in already.