This post was originally published on this site.
00:10 Speaker A
It’s the feel good time of year. So on today’s Stocks in Translation, we are breaking down sentiment.
00:17 Speaker A
And let’s be honest, feelings, they are messy. They’re hard to quantify. You can ask 10 people how they feel, you’ll get 10 vastly different answers.
00:26 Speaker A
But the way we use it, sentiment is really just a catch all term for a whole bunch of moods about the economy or markets, from optimism and bullishness to pessimism and bearishness.
00:39 Speaker A
And for better or worse, all of them have a number attached, which helps us track changes over time. And different sentiment indicators measure different feelings. That’s why they can disagree and that’s why they’re useful.
00:52 Speaker A
So let’s take a look at the different types of sentiment indicators, which we can think of as a toolkit. Now, this isn’t quite exhaustive, but it’s getting close.
01:02 Speaker A
We have the University of Michigan Consumer sentiment survey, also consumer confidence. That’s how people on Main Street feel about their money, jobs and prices.
01:12 Speaker A
Some surveys pull investors like the Investors intelligent advisor sentiment. That’s the Wall Street newsletter crowd. That’s what the market commentary class is recommending.
01:23 Speaker A
And then there’s the AAII investor sentiment. That’s the individual investor pulse check.
01:30 Speaker A
and the NAAIM exposure index. Yes, we got lots of acronyms here, but this one is big. It’s pro positioning, how investment managers are actually lined up from cautious to fully invested.
01:45 Speaker A
Then we have market-based invest indicators. You probably heard of the Vix volatility index. This is the price of insurance on the S&P 500, how the pros are feeling about the market 30 days out.
01:58 Speaker A
When the Vix is low, protection is cheap. and when the Vix is high, institutional investors are paying up to protect themselves.
02:08 Speaker A
Then there’s the CBO put to call ratio. This is options traffic. and traders buying more protection, are they buying that or are they chasing more upside?
02:20 Speaker A
And though it’s not shown, you could also throw short interest in here. How many people are betting against a stock? Because that’s another window into bearish energy.
02:30 Speaker A
Then we also have credit spreads and this measures the stress in the bond market. When spreads widen, the cost of money to riskier borrowers, it goes up and lenders get nervous. And when spreads are tight, credit is basically saying things are fine for now.
02:46 Speaker A
And finally, there are market internals. This is the under the hood check, what we call breadth. How many stocks are actually participating in a move and our markets concentrated.
03:00 Speaker A
Now let’s see where all of these indicators are lining up right now.
03:04 Speaker A
So first, consumers are feeling down and they’re not feeling very well. Consumer sentiment is hovering near multi-decade lows, prices have gone up, jobs are getting harder to find and everyone still remembers the sticker shock from recent years.
03:22 Speaker A
But when it comes to markets, investors seem okay, even calm. So take the Vix, which is now under 15, very quiet. The pros are not too worried about a market shock. But the positioning gauges are showing that many investors are heavily exposed. That tells you right there that there’s big risk appetite, which is great, but if that gets to be too big, it can be a contrarian indicator that things are getting crowded.
03:51 Speaker A
And finally, under the hood, things look okay, but we should be on alert for cracks. Market internals are showing decent participation and credit spreads are still historically low.
04:05 Speaker A
And then thinking ahead to 2026, we know that Main Street feels bad, but Wall Street feels okay, and that gap can last a while. So it’s where the most important signals live.
04:17 Speaker A
So watch those credit spreads. If credit starts to tighten its belt, stocks tend to take notice shortly after.
04:24 Speaker A
Then watch for a Vix regime shift. One spike probably doesn’t matter, but it does if the Vix stops falling back down after a pop. That is if the market starts pricing in a new baseline of stress.
04:40 Speaker A
And keep an eye on breadth. If participation rolls over while prices keep climbing, that is a classic warning light.
04:49 Speaker A
And then there’s positioning. Watch those surveys of the pros and retail investors. When everybody’s all in, there’s less fuel left. And when everybody starts de-risking at the same time, moves can get magnified.
05:05 Speaker A
Finally, keep tabs on jobs and inflation expectations. If people start expecting more layoffs or they stop believing prices will cool, that mood can turn into real behavior, less spending, more caution.
05:22 Speaker A
Much like life, the fields of the market and the economy can be messy, but when the big picture starts changing, things usually line up quickly and that’s when you can get some of the cleanest signals.
05:36 Speaker A
And tune into the Stocks and Translation podcast for more market j- more jargon busting deep dives. New episodes can be found Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcast.