These 3 sentiment indicators are giving off a bullish signal for the consumer and stock market, DataTrek says

• Three indicators that measure consumer and investor sentiment are flashing bullish signs, according to a Thursday note from DataTrek Research.
• Google search trend data for “dow jones,” the level of cash investors are holding, and mutual fund and ETF flow data all suggest that the stock market may have more room to run.
• “The most recent data shows a return to normal/complacent levels … this is good news,” DataTrek co-founder Nicholas Colas said.
• Visit Business Insider’s homepage for more stories.

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A gauge of consumer and investor sentiment is a helpful tool when attempting to determine what the current contrarian trade is.

A high reading of investor sentiment tends to be bearish for stocks in the sense that the contrarian trade is to sell stocks, while a low reading of investor sentiment tends to be bullish for stocks in the sense that the contrarian trade is to buy stocks.

Currently, the sentiment indicators are hovering near the middle ground after recovering from a low reading earlier this year, suggesting that the stock market may have more room to run.

In a Thursday note from DataTrek Research, co-founder Nicholas Colas highlighted three sentiment indicators to help gauge what investors and consumers are thinking about stocks.

Read more: Lori Keith’s mutual fund has grown 98,000% in 12 years by focusing on unflashy companies. She told us about 7 such stocks that thrived in the recession – and will do even better in the recovery.

1. Google search trends of the words "dow jones"

This Wall Street/Main Street indicator is contrarian because "when volumes spike by 5x-10x in a short period of time, you know sentiment is bad enough that an investable bottom is nearby," Colas said.

But when searches start to trail off, it's a sign that consumer confidence usually rises, according to the note. 

Following an initial spike amid the COVID-19 pandemic in February and March, the search interest for "dow jones" remained elevated all the way through early October. 

"But the most recent data shows a return to normal/complacent levels. This is good news," Colas said.

2. Level of cash investors are holding

"Cash balances remain elevated versus pre-recession levels," DataTrek said, adding that this is the usual pattern after an economic shock.

"Capital invested here [cash] tends to only dribble out slowly once investor confidence improves," Colas said, adding that contrarian investors should be bullish on stocks based on this chart.

3. Mutual fund and ETF fund flow data

Recent fund flow data has been generally positive for equity funds, sluggish for fixed income funds, and negative for commodity funds, according to DataTrek.

"Money flow data threads the sentiment needle of what Google Trends reveals (general complacency is back) and the money market balance information (cash is still king). Fund investors slowed up on US equity redemptions, are waiting to see if rates climb, and have lost a bit of their fascination with precious metals. A mixed message, but it does not strike us as bearish," DataTrek said.

Read more: 200-plus money managers pay thousands to see which stocks are on Jim Osman's buy list. He details 2 he sees doubling, and one that has at least 50% left to soar.

All together, the continued disinterest in the search word "dow jones" combined with high levels of cash in money market funds suggests a contrarian picture for stocks to continue rising. 

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