Analysts have long relied on sentiment and related risk-taking data as contrarian indicators. As friends, coworkers, and strangers invest money in stocks and tell you about it, it’s time to take shelter from this way of thinking. Likewise, when everyone is selling, you should buy with two hands.

But for much of that year, he’s paid huge dividends to stay with the herd. This is the latest deviation from what has been proven in a year that has already led to a surge in memes stocks, record lumber prices and a bond market rally in the face of the rising price. inflation. In short, it’s now that analysts and portfolio managers are starting to wonder if it’s really any different this time around.

“We had our hands up for a while,” said Jason Goepfert, president of Sundial Capital Research. “For whatever reason, the market is just going through all of these historical indicators that previously had very consistent backgrounds.”

Over the coming week, traders will analyze data on housing starts and building permits, as well as earnings from companies such as Johnson & Johnson and United Airlines Holdings. Inc.,

for more clues on price pressures.

They will also monitor if the sentiment is wavering. Recently, signs of weakening sentiment have started to appear across some indicators, although the uptrend remains well above or near long-term averages.

Americans’ equity allocations hit nearly 60% in late March, a figure just below the all-time high of 61.7% reached during the dot-com bubble, according to Ned Davis Research data dating back to 1951.

A July survey by retail brokerage firm E * Trade found that optimism among individual investors in the platform recently peaked more than three years, reaching 65%. Additionally, the oft-observed share buy-sell ratio – which measures the volume of bearish option bets placed on stocks relative to bullish bets – earlier this year recorded sustained levels of optimism without previous since 2000.

The source of the optimism that fueled 39 records this year on the S&P 500 is not hard to guess. In particular, there is an unusual and potent mix of stimulus and accommodative monetary policy that has left investors with plentiful liquidity and few sources of stable return on investment. The arrival of a new cohort of retail traders has also given prices an additional boost.

Analysts say the combination of these factors has pushed markets higher, giving traders enough momentum and opportunity to ignore signs of tense sentiment, as well as other risks, including the outlook for unclear inflation and increasing coronavirus cases.

Recently the breadth of the market, or a measure of the number of stocks participating in a rally, has deteriorated, although major indexes have continued to hit all-time highs.

On Thursday, only around 49% of S&P 500 stocks were trading above their 50-day moving averages, according to FactSet, a below-average level and a sharp reversal from just a few months ago, when this metric reaches more than 90%. According to Liz Ann Sonders, chief investment strategist at Charles Schwab, it’s a troubling sign as sentiment remains so high.

“Any longtime sentiment observer knows that breadth is a positive counterbalance to extreme sentiment conditions,” Ms. Sonders said. “But when the breadth starts to deteriorate and the market is still trading at or near historic highs, and there has been no impact on sentiment conditions, it’s up to that is when the problems are really brewing. “

But sentiment can stay high for long periods of time, as it did in the late 1990s, she said. And while the major indices have risen, the pockets of excess have run out of steam.

“In places where speculation has been rampant, you’ve seen massive declines – in cryptocurrencies, [special-purpose acquisition companies], nonprofit tech companies and memes stocks, ”Ms. Sonders said.

According to a recent note by Charles Schwab based on data from Ned Davis Research, when stocks held by US households have already reached the highest levels, the S&P 500 has tended to produce modest returns on average over the years. following. For example, when household equity allocations reached 54.6% or more, as they did during the dot-com bubble and the years leading up to the 2007-2009 recession, the average annualized return of the S&P 500 over the next 10 years was 4.1%

In contrast, when equity allocations hovered around 29% or less, the average annualized return over the next 10 years for the benchmark was 16.3%.

Even so, the unique market conditions this year could allow stocks to continue to rise.

“The markets do their own thing,” Goepfert said. “Something has changed. Whether it’s unprecedented stimulus or maybe there’s this generational shift with young investors. This new surge in the market continues to push stocks higher. “

Write to Caitlin McCabe at [email protected]