- Investors' fear of missing out on the current stock market rally could power further gains, according to Ned Davis Research.
- Sentiment indicators continue to show subdued bullishness among investors.
- "Large hedge funds and asset managers remain bearishly positioned, suggesting that the pain trade could be higher," NDR said.
Current sentiment indicators show that investors' fear of missing out on the current stock market rally could drive further gains ahead, according to a note from Ned Davis Research.
The research firm highlighted that its internal crowd sentiment poll, which fell in mid-June to bearish levels not seen since December 2018 and early 2016, has partially recovered but still remains far from excessively optimistic.
Other sentiment indicators show similar findings, with CNN's Fear & Greed Index currently in Neutral territory, and the most recent AAII Investor Sentiment Survey revealing only 33% of respondents are bullish, well below its historical average of 38%.
"Short-term sentiment has rebounded, but intermediate-term sentiment suggests the fear of missing out (FOMO) could continue to motivate traders," NDR said.
That's because bearish investors had plenty of chances earlier this year to position their portfolios to have little equity exposure as concerns were mounting that the Federal Reserve would send the economy into a recession by raising interest rates to tame inflation.
But as it now looks increasingly likely that the economy will stick a soft landing, it will take time for bearish investors to admit defeat and reposition their portfolio's towards equities, thus creating further buying pressure down the road.
"Large hedge funds and asset managers remain bearishly positioned, suggesting that the pain trade could be higher if big investors are forced to cover their shorts," NDR said.
The combination of FOMO among investors, improving macro data in the form of better than expected second-quarter earnings results, and bullish technicals means the stock market rally could extend further for several more weeks.
"Overall, the technical broadening has continued to track the typical behavior of an early bull market," NDR said when highlighting the bullish technicals it sees in the stock market.
"Adding in FOMO sentiment, the rally can continue for several more weeks. At that point, if there is not a light at the end of the macro/fundamental tunnel, the market may be at risk of another down leg. Conversely, if technicals continue to broaden and/or macro conditions improve, we will look to add equity exposure," NDR said.