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.