Investors spooked, but market retreat is ‘healthy’

The recent pullback has spooked ordinary investors. Retail sentiment, as measured by weekly American Association of Individual Investors (AAII) polls, had picked up as stocks spiked in early 2023 – only a quarter of investors described themselves as bearish when markets peaked in early February. However, there has been a rapid about-turn in sentiment over the last fortnight: now, AAII polls show almost twice as many bears as bulls.

The speed of the U-turn is marked, given the modest nature of the pullback. The S&P 500 has fallen around 6 per cent, which is a common enough occurrence. It remains in positive territory for 2023 and is well above October 2022′s market low.

Investors are still grappling with the same issues that dominated 2022 – high inflation, rising rates, falling earnings, recession fears. Clearly, many worry that stocks will ultimately fall below last year’s lows. They might, but the recent retreat looks “healthy”, says Nautilus Research. It notes that there has been a decline in the percentage of global markets trading above their one-year moving average.

“Historically, similar signals have marked a necessary ‘recycling’ of short-term extended conditions that tended to reprime the pumps for fresh upside,” it says. Specifically, it found 15 instances that mirrored recent global market action. Nine months later, the S&P 500 was up every single time, sporting above-average gains, while the action in global indices was similarly encouraging.