Washed Out Sentiment, Loaded Spring

• The CNN Fear and Greed Index is in “extreme fear” territory.

• The AAII bull versus bear spread is extremely bearish.

• The S&P 500’s relative strength index is oversold.

Bull markets don’t break when people are scared; they break when people stop being scared…

Last week I highlighted rising institutional investor pessimism. I pointed to data from the National Association of Active Investment Managers (“NAAIM”) Exposure Index. It’s one of the easiest ways to see how professional investors are positioned. It captures where money managers are sitting in U.S. equities, anywhere from fully short (-200%) to fully leveraged long (+200%) and distills it into a single number.

Late last year, the gauge logged multiple readings north of 100 in November and December. That was a sign that active managers had pushed into leveraged‑long territory. But that posture hasn’t held. Recent readings show the index slipping back to 60 for the first time since April 2025 — a meaningful shift from “all‑in” to “dial it back.” It also means the gauge has now fallen below its long‑term average of 67…

Historically, those types of pullbacks have led to above average returns for the S&P 500 Index. The 12‑month total‑return (dividends reinvested) numbers stand out: a 12.3% average gain with a 77% success rate, well ahead of the S&P 500’s long‑term 9.7% annualized total return.

I find data like this especially timely given recent discussions around possible ceasefire talks with Iran. It gives us a sense of whether investors are positioned for a resolution in the Middle East. Based on the data, they aren’t.

Given that backdrop, it made sense to check in on similar gauges that track retail sentiment. What I found was striking: many of these indicators haven’t been this low since April 2025, shortly before the stock market rallied 40%. That tells me that if the U.S. and Iran are able to sort out their differences, the setup points to a sharp rally in the S&P 500.

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

One of the first places to start is the CNN Fear & Greed Index. It distills seven market‑behavior signals into a single read on whether investors are acting out of panic or chasing upside. It swings between extreme fear and extreme greed. The boundaries matter because fear often marks exhaustion on the downside, while greed signals complacency on the upside. Think of it as a way to see when emotion is driving the tape harder than fundamentals, and when the crowd may be leaning too far in one direction to stay there for long.

Right now, the gauge points to extreme fear. The gauge hasn’t been this low since April 2025…

We see a similar signal when we look at the S&P 500’s relative strength index. RSI is a simple momentum gauge that shows when buying or selling pressure has pushed too far in one direction. It runs on a scale of 0 to 100. Readings above 70 hint that buyers have overextended themselves, while drops below 30 suggest sellers have done the same. RSI doesn’t pretend to forecast fundamentals. It just tells you whether recent price action has been one‑sided enough to matter, and it often flags a shift in momentum before the chart itself starts to turn.

The most recent data show the gauge dropping back below 30 for the first time since last April. That means any positive catalyst surprise could create a snapback rally in the stock market…

Now let’s look at the American Association of Individual Investors’ sentiment gauge. It measures how individual investors expect the stock market to behave over the next six months, capturing the percentage of investors who are bullish, neutral, or bearish. It’s one of the longest‑running gauges of retail investor psychology and is widely used as a contrarian indicator.

Recent readings show that the spread between bullish and bearish sentiment has tilted decisively negative, hitting one of the lowest levels since April of last year…

It’s currently hovering around levels that have pointed to stock market troughs in the past. Since 2013, there have been nine instances with similar readings. They have led to above average gains for the S&P 500 Index with an average one-year total return of 22%, and a typical two-year gain of 45% …

Across every sentiment gauge that matters, investors are positioned defensively and appear emotionally exhausted. That’s not what the top of a bull market looks like. It’s what the early stages of a recovery often feel like. Bull markets don’t die on fear; they die on euphoria, and we’re sitting at the opposite end of that spectrum.

If geopolitical tensions ease even modestly, the combination of washed‑out sentiment, underexposed managers, and historically strong forward returns creates a backdrop where the S&P 500 doesn’t just stabilize, it accelerates. The data tell us the same thing from three different angles. The market is set up for a positive surprise.

Five Stories Moving the Market:

Saudi Arabia’s crucial East-West pipeline that circumvents the Strait of Hormuz is pumping oil at its full capacity of 7 million barrels a day; Crude exports via Yanbu have now reached about 5 million barrels a day while the other 2 million are destined for Saudi refineries – Bloomberg. (Why you should care – the development should help to offset almost one-third of global shipments lost via Hormuz)

Pakistan’s Deputy Prime Minister Ishaq Dar announced that Iran agreed to let 20 vessels sailing under the Pakistani flag through the Strait of Hormuz; two ships will cross per day, according to a statement on social media – NY Times. (Why you should care – letting vessels destined for Asia pass through Hormuz would mean energy resources are reaching the largest users of those resources)

The White House is signaling to allies that it has no immediate plans for a ground invasion of Iran, even as it deploys thousands of troops to the Middle East, people familiar with the matter said - Bloomberg. (Why you should care – the White House is likely deploying troops to the region to get Iran to the negotiation table)

U.S. Secretary of State Marco Rubio told G7 foreign ministers that the war with Iran will continue for another two to four weeks; Rubio told his G7 counterparts that the U.S. is still communicating with Iran through mediators, rather than directly – AXIOS. (Why you should care – Rubio said two Iranian officials want to negotiate with the U.S., but they need approval from the top leadership)

The risk of an expanded Iran war rose as Yemen's Iran-aligned Houthis launched their first attacks on Israel since the start of the conflict, even as additional ​U.S. forces reached the Middle East – Reuters. (Why you should care – the Houthi said they would continue to attack until aggression ended on all fronts)

Economic Calendar:

Earnings – APC, HUBG, PRGS, USAR

Japan – BoJ Summary of Opinions

U.K. – BoE Consumer Credit for February (4:30 a.m.)

Eurozone – Consumer Confidence for March (5 a.m.)

Eurozone – Consumer Inflation Expectation for March (5 a.m.)

U.S. – Wholesale Inventories for February (9 a.m.)

U.S. – Dallas Fed Manufacturing Index for March (10:30 a.m.)

Fed’s Powell (Chair, Voter) Speaks (10:30 a.m.)

Treasury Auctions $89 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

Fed’s Williams (New York, Voter) Speaks (4 p.m.)