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Sentiment Sours

Mike Zaccardi

FINANCIAL MARKETS had a lot to digest in recent days: Retail analysts are keeping a close eye on holiday spending, economists got their latest dose of employment data—and traders are coming to grips with the current bout of volatility.

The VIX, the S&P 500 Volatility Index or “fear gauge,” surged above 30 on Friday. That was the highest end-of-week close since January. For perspective, the VIX climbed to 80 during 2020’s COVID-19 stock market crash. It was as low as 15 during periods of relative calm earlier this year.

What’s driving the uncertainty? It’s hard to pin it on one narrative. The Omicron variant wasn’t the sole culprit. After all, both travel and stay-at-home stocks were hit hard last week. Instead, it might just be stock market investors taking a little money off the table.

Market analysts at Bespoke Investments point out that the average stock in the S&P 1500 is now 19.1% below its 52-week high. There’s been a stealth correction taking place beneath the market’s surface since February—all while the broad market kept within a few percentage points of its all-time high.

Small-caps, value stocks and foreign shares have all endured notable drawdowns this year after impressive rallies off the March 2020 lows. Since March 2021, however, those niches of the stock market have turned very choppy.

The last few weeks shouldn’t come as a surprise to long-term investors. Dips happen. Quite often they occur when folks are overly optimistic about the near-term direction of the stock market. Back on Nov. 10, 48% of those surveyed for the weekly AAII (American Association of Individual Investors) Sentiment Survey were bullish, well above the long-term average. Stocks then dropped, and suddenly less than 27% are bullish, according to last Thursday’s survey. Maybe investor sentiment is finally catching up with the rough 2021 suffered by many stocks.

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