Indicator shows Fear is back

Key points:

• The Fear & Greed Model, a sentiment indicator, declined to one of the lowest levels in history
• After similar signals, the S&P 500 struggled over the subsequent two months
• A more favorable setup occurs after the model cycles from less than 10% to greater than 66%

Sentiment indicators work best when they reverse from an extreme

Sentiment measures are increasingly revealing a growing sense of pessimism in an environment that already exhibits a lack of confidence in the stock market's prospects.

Recently, one of those indicators, the Fear & Greed Model, dropped below 10% for only the 31st time since 1998, suggesting a heightened level of fear among investors.

Similar sentiment extremes suggest the S&P 500 could struggle

Whenever the Fear & Greed Model dips below 10%, the S&P 500 encounters difficulties in the following two months.

Two months out, the S&P 500 was higher just 48% of the time, carrying a negative median return.