Investors Are So Bearish on Stocks That the Market Looks Bullish

(Bloomberg) -- Investors have become so negative about the stock market that Wall Street is starting think a rally may be on the way.

JPMorgan Chase & Co. strategists led by Marko Kolanovic said this week that “investor sentiment is reaching extreme weakness,” meaning a rebound could be on the cards. Meanwhile, a Societe Generale SA sentiment indicator recently dropped to levels last seen during the peak of Covid-19 lockdowns in 2020.

“This will likely culminate in a bounce in equities,” Societe Generale strategists Manish Kabra and Arthur Van Slooten wrote last week.

Other market technicals could be pointing to a short-term bounce as well.

The U.S. put-call ratio's absolute level is near the highest since January after investors built up hedges into the falling market amid fears of a recession and aggressive tightening. Barring another big shock, this should provide some support to stocks as investors begin to unwind those hedges after the Federal Reserve's interest-rate decision on Wednesday.

In addition, the Cboe Volatility Index, also known as the VIX, has been at or above 30 for the past week -- it touched a high of 32.82 on Tuesday. Traders typically consider a reading of over 30 to be a sign of significant fear in the market.

More importantly, the spread between two-month and eight-month VIX futures contracts is trading near peak levels seen earlier this year, showing deep uncertainty about the near-term. This indicator of short-term stress has historically been a turning point for risk assets, with volatility topping out in the days leading up to the Fed's prior three meetings this year.