Washed‑Out Sentiment, Loaded Spring

Editor’s Note: At the end of March, I put together a number of indicators discussing the high levels of institutional and retail investor pessimism. At the time I noted that the stage could be set for a sharp stock-market advance if tensions between the U.S. and Iran were resolved.

Last night, the two sides announced they had reached a two-week ceasefire deal. They also said discussions will begin to reach a longer-lasting agreement. So, I wanted to re-circulate this analysis as I believe a longer-lasting deal could be the start of broader rally.

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…

Timeframe	Average Return	Success Rate
1-Month	1.1%	67%
3-Month	3.0%	69%
6-Month	6.0%	71%
12-Month	12.3%	77%

 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% …

Timeframe:	3 Months	6 Months	12 Months	24 Months
Average Return:	8%	11%	22%	45%
Success Rate:	75%	75%	88%	100%

 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:

The U.S. and Iran agreed to a two-week ceasefire that’s expected to halt the American-Israeli military campaign in exchange for Tehran reopening the Strait of Hormuz; President Donald Trump announced the agreement on social media hours after Pakistan implored the U.S. leader to back off his deadline to unleash massive devastation on Iran if it did not meet his demands - Bloomberg. (Why you should care – the ceasefire provides the two sides with time to reach a broader agreement and end the conflict)

Iran’s Supreme National Security Council said that negotiations with the U.S. will start Friday in Islamabad; the Council said the two-week cease-fire period could be extended if both sides agree - WSJ. (Why you should care – the White House could have difficulty getting congressional approval for the conflict to extend beyond 90 days, likely boosting the potential for a long-term agreement)

Federal Reserve Vice Chair Philip Jefferson said the central bank’s policy setting remains appropriate, though the Iran war will stoke uncertainty and push U.S. inflation higher in the near term – Reuters. (Why you should care – Jefferson is signaling there’s no need for the Fed to raise interest rates unless the current oil price shock persists) 

Japanese workers’ wages adjusted for inflation rose at the fastest pace since 2021; real wages increased 1.9% from a year earlier in February, marking a second straight monthly gain, the labor ministry – Bloomberg. (Why you should care – the trend implies the Bank of Japan is on track to raise interest rates again later this year)

New orders for key U.S.-manufactured capital goods increased more than expected in February while shipments of those products rose solidly, suggesting business spending ​on equipment was on firmer footing before the war with Iran – Reuters. (Why you should care – the data suggests economic growth was on solid footing prior to the March jump in energy prices)

Economic Calendar:

Earnings – DAL, RPM, STZ

Reserve Bank of New Zealand Monetary Policy Decision

Japan – Overall Wage Income for February

Germany – Factory Orders for February (2 a.m.)

France – Exports, Imports for February (2:45 a.m.)

Eurozone – Retail Sales for February (5 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

Treasury Auctions $39 Billion in 10-Year Notes (1 p.m.)

U.S. – FOMC Meeting Minutes (2 p.m.)