Are Retail Investors Bearish EnoughTo to Produce A Buying Opportunity?
Has The Bullish Euphoria Completely Gone?
One of the defining characteristics of the investment climate since the appearance of COVID in March 2020 has been the return of the influence of retail investors on markets to levels last seen in the 1960s.
The seemingly unbridled optimism of retail investors drove leaders of the past bull market to valuation extremes that, at times, exceeded the excesses seen during the internet bubble. Buoyant investor sentiment was also reflected by the enthusiasm for dubious investment concepts such as “crypto” currencies.
The bullishness of retail peaked in early 2021, as reflected by the accompanying chart below, which illustrates the level of call option buying by small investors. Retail investor sentiment has cooled since its peak, with the weak equity markets of 2022 serving to accelerate the process.
However, call buying by retail levels remains above the levels seen in the pre-COVID days of 2019, which suggests that we have yet to see the development of bearish sentiment that is typically associated with major market bottoms.
Extremes of investor sentiment (bullish and bearish) have proven to be reliable precursors of major market turning points. That chart suggests that investor sentiment has yet to reach a negative extreme, meaning further caution is warranted in establishing positions.
The abundance of available catalysts for global market volatility has produced an investment climate of significant risk but also great potential opportunities for pragmatic investors.
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