More bad news points to a potential stock market crash, as investor sentiment just hit a new low.
Indeed, the latest data from the American Association of Individual Investors shows that investor sentiment is now at its lowest level since May of this year, posting a 40.9% bearish reading. The low point in sentiment comes as investors fret about multiple issues that could negatively impact the stock market, including further interest rate hikes, entrenched inflation, higher energy prices, a looming government shutdown in Washington, D.C., and rising levels of household debt.
Stock Market Crash Alert: Bad Vibes Among Investors
With one trading day left in the third quarter, all the major stock indices look likely to finish the July through September period in the red. The benchmark S&P 500 index has fallen 6% since peaking on July 31. The tech-laden Nasdaq index has declined 8% in the last two months. The selloff that began in August amid mixed corporate earnings has accelerated in September after the U.S. Federal Reserve signaled more interest rate hikes could be coming and that rates are likely to stay higher for longer than previously expected.
With the central bank’s Fed Funds Rate now at its highest level in 22 years, consumers are starting to feel the strain as they grapple with higher interest rates charged on everything from their credit cards to their home mortgages. Add in gasoline prices that are once again marching higher with crude oil back above $95 a barrel, and the mood among consumers has darkened. The bad vibes have spilled over to the stock market, where a growing number of people are selling equities.
Bearish Bets
The poor sentiment extends beyond retail investors. Recent data shows that a growing number of hedge funds are placing bearish bets against stocks. In a recent note to clients, investment bank Goldman Sachs (NYSE:GS) said that its institutional clients have been mostly shorting the market while unwinding their long positions. “Hedge funds have been pressing U.S. shorts in five of the past six weeks, and this week’s notional short selling was the largest since Sept. 22,” wrote Goldman Sachs.
Some prominent and closely followed investors are also betting on a stock market crash. Notably, Michael Burry of the “Big Short” fame. In mid-August, it was revealed that Burry has placed a $1.6 billion bet on a stock market crash. Specifically, Burry has shorted a well-known fund that tracks the S&P 500 index and another fund that tracks the Nasdaq 100. Burry, who correctly anticipated the 2008 financial crisis, is using more than 90% of his portfolio to bet on a stock market downturn, according to regulatory filings.
What’s Next
While it is true that September is the worst month of the year for stocks, this time feels different. Sentiment seems to be worse than usual for this time of year and there are a number of headwinds facing investors right now. Will the current situation result in a stock market crash? It’s difficult to know. But what is clear is that a growing number of investors appear to be battening down the hatches and preparing for the worst.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
