Widespread Investor Pessimism Could Signal S&P 500 Upside

The crowd is scared, but smart money might be seeing an opportunity. The latest AAII Sentiment Survey just flashed a contrarian Buy signal, with bullish sentiment hitting its lowest level since the S&P 500‘s November 2023 bottom.

Historically, extreme pessimism has been a strong indicator of future gains, and for SPDR S&P 500 ETF SPY investors, this could be the moment to lean in.

The Bearish Mood That Bulls Love

The American Association of Individual Investors (AAII) survey shows that only 25.4% of investors are bullish—far below the historical average of 37.5%. Meanwhile, bearish sentiment has jumped to 40.6%, its highest in a year. When the crowd is this fearful, market bottoms tend to form, making this a classic contrarian buy setup.

For SPY investors, the implications are clear: history suggests these extreme readings often mark a turning point. But technicals are sending mixed signals, creating a dilemma for those trying to time the next move.

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SPY's Technical Setup: A Balancing Act

SPY has been on a tear over the past year, up 25.3%, but recent action suggests hesitation.

Chart created using Benzinga Pro

Trading at around $591.64, it’s sitting above key moving averages, reinforcing a bullish trend. However, signs of selling pressure are emerging:

• Short-term strength: The eight-day and 20-day moving averages signal a bullish trend, supporting further upside.
• Longer-term caution: SPY is trading below its 50-day moving average of $595.08, hinting at potential weakness.
• MACD (moving average convergence/divergence) says "proceed with caution": With a negative 1.95 reading, momentum indicators suggest a possible slowdown.
• RSI (relative strength index) at 50.11: Neither overbought nor oversold, meaning SPY is at an inflection point.

Investor Takeaway: Buy The Fear Or Sit Tight?

The AAII survey’s pessimistic reading suggests that fear is peaking, a historically bullish sign. But with SPY hovering near record highs and technicals flashing mixed signals, investors may need to balance optimism with caution.

For contrarians, this could be a prime entry point. For others, waiting for a clearer technical setup might be the smarter move.

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