Fear Is Doing the Heavy Lifting

• CNN’s Fear and Greed Index just rebounded from “extreme fear.”

• AAII’s bull/bear spread only recently turned positive.

• Bull markets tend to climb a wall of worry.

The market’s rising, but sentiment hasn’t gotten the memo…

It’s hard to believe I’m saying this, but June is already slipping away. School’s out, Independence Day is around the corner, and summer vacation season is in full swing. To me, this has felt like one of the fastest first halves of a year in recent memory.

Looking back, the pace makes sense. First‑quarter corporate earnings blew the doors off expectations. The U.S. bombed Iran, bringing Persian Gulf oil exports to a near standstill. Inflation accelerated as oil spiked. And now, the U.S. and Iran are working toward a peace deal, sending crude lower again. That’s enough drama to fill a couple of years, let alone six months.

Yet, through it all, the U.S. economy keeps holding up. According to the Federal Reserve Bank of Atlanta, second quarter economic output is on track to grow 2.5%. That’s above the long-term average. And as a result, the S&P 500 Index has rallied 8.5% so far this year…

Given that backdrop, you’d think investors would be more optimistic. They aren’t. The gauges I watch show broad pessimism. Historically, when sentiment is this downbeat, rallies usually aren’t far behind. That’s the kind of setup that can support a steady, long‑term advance in the S&P 500.

But don’t take my word for it, let’s look at what the data’s telling us…

The first place I go for sentiment is the CNN Fear & Greed Index. It’s designed to show when emotions swing to extremes. Those extremes tend to be contrarian signals: extreme greed often marks overbought conditions, while extreme fear marks oversold conditions. Herd mentality pushes everyone into the same trade.

Last night, the gauge closed at 27. At the end of last week, it hit extreme fear at 24. Not the worst I’ve ever seen, but still deeply pessimistic. The two readings that stand out in my memory are the “2” in early 2020 and the “12” in late 2008. Both were on the front end of major sentiment shifts and rallies.

Next, I look at the American Association of Individual Investors (“AAII”) survey, which dates back to 1987. Each week, members say whether they’re bullish, bearish, or neutral. It’s another contrarian indicator: pessimism tends to peak near market bottoms, while optimism peaks near tops.

In the chart, I subtract the bearish reading from the bullish one. Negative means more pessimists; positive means more optimists. Last week’s reading was 8.8, the first positive spread since early May and only the fifth positive in the last 20 weeks. Historically, long stretches of pessimism, like the 15 straight weeks last year, have preceded above‑average S&P 500 gains over the following 3‑, 6‑, and 12‑month periods.

The last place I check is the Commodity Futures Trading Commission’s weekly Commitment of Traders report. It tracks positioning across futures markets. I focus on net non‑commercial positions — the one‑way bets of large speculators.

As the chart shows, downside bets have been building. Recent data shows speculators have amassed nearly 200,000 short contracts against the stock market. That’s more than double the short positioning from late March, when stocks were troughing.

So, as I said at the start, the current environment is fraught with doubt. That sentiment has pushed investors into an overly pessimistic stance. Eventually, as stocks keep rising, those same investors will capitulate and buy back in. And as that shift unfolds, it will likely support a steady rally in the S&P 500 Index.

Five Stories Moving the Market:

Prime Minister Sanae Takaichi is staking her legacy as Japan’s first female premier on an unprecedented plan to reshape the country’s industrial base for decades to come; at the heart of Takaichi’s initiative is a ¥370 trillion ($2.3 trillion) investment blueprint that joins hands with the private sector with a scope and scale unlike anything envisioned by her predecessors – Bloomberg. (Why you should care – the spending plan is likely to increase downside pressure on the Japanese yen, boosting the U.S. dollar)

The European Central Bank does not need to fight inflation now with the same force it did in 2022-23, according to President Christine Lagarde; she said policymakers could now “make measured adjustments to rates, calibrated to the shocks we face” – FT. (Why you should care – Lagarde’s commentary implies that any ECB rate hikes are likely to be limited)

The Supreme Court rejected President Trump’s bid to fire Federal Reserve governor Lisa Cook with little legal scrutiny; justices signaled they believed the Fed was entitled to special protections from political interference – WSJ. (Why you should care – the decision hampers the White House’s effort to remake the central bank in an attempt to lower interest rates)

U.S. President Donald Trump said peace talks with Iran are set to resume in Doha, after both sides agreed to halt a series of tit-for-tat attacks over the Strait of Hormuz – Reuters. (Why you should care – the White House said Tehran requested the meeting following earlier reports that Iran had no plans to meet this week)

France’s Emmanuel Macron and Oman’s Sultan Haitham bin Tariq said that they would promote restriction-free transit in the Strait of Hormuz; they agreed to promote freedom of navigation in the future and to conduct joint mine-clearing operations – Bloomberg. (Why you should care – the two leaders said the Strait must remain open without conditions or restrictions, in accordance with international law)

Economic Calendar:

Earnings: NKE, PRGS, STZ

Germany – Retail Sales for May (2 a.m.)

France – CPI for June (2:45 a.m.)

BoE’s Breeden (Deputy Governor) Speaks (6:40 a.m.)

ECB’s Lane (Chief Economist) Speaks (7:30 a.m.)

Germany – CPI for June (8 a.m.)

U.S. – FHFA House Price Index for April (9 a.m.)

U.S. – S&P CoreLogic Case-Shiller Home Price Index for April (9 a.m.)

Reserve Bank of Australia Meeting Minutes (9:30 a.m.)

U.S. – Conference Board Consumer Confidence for June (10 a.m.)

U.S. – JOLTS Job Openings for May (10 a.m.)

Treasury Auctions $80 Billion in 6-Week Bills (11:30 a.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)

Japan – Tankan Large, Small Manufacturers Index for Q2 (7:50 p.m.)

South Korea – Exports, Imports for June (8 p.m.)

Japan – au Jibun Bank Japan Manufacturing PMI Final for June (8:30 p.m.)

China – Caixin China Manufacturing PMI for June (9:45 p.m.)