Sentiment in the stock market is all over the place as investors wonder whether the latest surge is sustainable or merely a bear-market rally

Sentiment in the stock market is all over the place as investors wonder whether the latest surge is sustainable or merely a bear-market rally
Lucas Jackson/Reuters
  • Stock market sentiment is mixed as investors consider whether the recent surge is just another bear market rally.
  • Investors have cause for concern as recession fears mount and prior stock sell-offs have seen multiple head-fake rallies.
  • "Of the prior 26 bear markets since 1929, 17 had rallies of more than 10%," Bank of America said.

The stock market's 9% rally from lows reached on May 20 have investors wondering if it's just another bear market rally or a sustainable move higher.

Part of the uncertainty stems from the fact that more and more people see an imminent recession as consumers grapple with high inflation and rising interest rates. Meanwhile, businesses are struggling with ongoing supply chain disruptions and uncertainties surrounding the Russia-Ukraine war.

Considering the heightened economic risks, it makes sense that investors have little conviction about which direction the stock market will move in the short term.

In fact, bear market rallies are actually common, Bank of America said in a Thursday note. The bank found that of the 26 bear markets since 1929, 17 experienced short-term rallies of more than 10%, with an average of 1.5 head-fake rallies per bear market.

"The 1932-33 bear market, which lasted 116 trading days (-40% peak to trough), had six distinct 10%+ rallies," Bank of America said in highlighting just one example of prior bear market rallies.


There have been three distinct rallies of 9%, 13%, and 9% since the S&P 500 peaked on January 4, though those occurred without the market officially entering bear market territory. The S&P 500 briefly hit an intraday peak-to-trough decline of 20% last month, but eventually recovered and never closed a trading day at the 20% decline level.

While some investors anticipate that the current market rally is poised to run out of steam, others are getting more bullish. The AAII investor sentiment survey saw its bullish responses surge 61% over the past week, while bearish responses fell by 31%.

And CNN's Fear and Greed sentiment reading, while still stuck in "fear" territory, has moved significantly off the lows of last week's "extreme fear reading."

But while Main Street investors seem to be getting more bullish, Wall Street analysts are turning more bearish. Bank of America's sell-side indicator fell to a two-year low last month and is now approaching contrarian "buy" signal territory.

"Our Sell Side Indicator, which tracks the average recommended allocation to stocks by US sell-side strategists, slipped from 55.7% in April to 55.0% in May, hitting a two-year low and marking the fifth consecutive month of decline," Bank of America explained.


To top it off, Wall Street's VIX fear gauge has been steadily declining, down more than 20% over the past month even as the S&P 500 traded to its lowest level in over a year.

With all of the divergences and mixed sentiment readings, it's clear investors are caught in no man's land as they gauge whether the stock market rally has more room to run or will turn into another head-fake rally and resume the five-month long downtrend.