Gauging Market Sentiment as a Contrarian Indicator

By Clear Perspective Advisors on May 1, 2025

Markets Bounce from Recent Lows

From the end of March through the beginning of April, we saw a full capitulation of market sentiment indicators. The CNN Fear and Greed Index, S&P Oscillator, and CBOE Volatility Index (VIX), three indicators that we track closely, are all off their recent extreme lows (or extreme highs). The S&P 500 and Nasdaq both bottomed on April 8^th, approximately 19% and 24% off their 52-week highs, respectively. At the same time, the market sentiment indicators we track also bottomed (or topped) out on this day.

As of April 28, the S&P 500 is up 10% from the lows, and the Nasdaq is up 13%. Throughout the selloff into the beginning of April, we have kept our eyes on companies we believe to be strong leaders in their respective markets – Amazon (AMZN), Meta (META), Snowflake (SNOW), Palo Alto Networks (PANW), and GE Aerospace (GE), to name a few. We break down these sentiment indicators below and discuss how we utilize them to help drive investment timing and decision making.

Chart 1: The S&P 500, Nasdaq, and CNN Fear and Greed All Bottomed on April 8^[1]

The CNN Fear and Greed Index uses seven indicators to track market sentiment. The index gives equal weight to each of the seven factors, comparing current values to historical averages, and providing a rank from extreme fear to extreme greed. Currently, the index is at 38^[2] (indicating fear) after bottoming at 3 (indicating extreme fear) on April 8^th – the day prior to the 90-day pause on reciprocal tariffs. For context, the index hit a reading of 2 during COVID and 12 during the Great Financial Crisis. We use the index as an objective way to gauge sentiment and look to buy when the index indicates extreme fear.

The VIX is a barometer for market uncertainty and measures market volatility utilizing the 30-day expected volatility of S&P 500 call and put options. The long-term average for the VIX is ~19, and today it is at 26 (down from the recent high of 53 hit on April 8). For context, the VIX hit an intra-day high of 65 during the yen carry trade unwind in August 2024 and hit nearly 70 during COVID-19. The GFC high was 89, hit late October of 2008. When the VIX spikes, volatility is heightened, and investor sentiment is usually low. During these times, market pricing tends to be irrational, which is a good time to seek long-term investment opportunities.

Lastly, the S&P Oscillator is another indicator we use to track investment sentiment. It is a technical indicator used to analyze market sentiment, specifically market breadth based on advancing and declining members of the S&P 500. The index hit a reading of -9% on April 7, and -11% on April 8. Overbought or oversold conditions are present when the index is +/- 4%, with extreme fear present at +/- 10%. Extreme fear hit at the start of April, which is usually a time to be contrarian, which we were. Today, the oscillator is at 5.2%, a massive move since the -11% reading just three weeks ago.

Chart 2: Two Weeks Ago, The VIX Hit the Second-Highest Level in 10 Years^[3]

Where We Go from Here

Sentiment gauges have vastly improved from April 8^th lows. Markets have more clarity with the current 90-day pause on reciprocal tariffs and trade talks happening with over 30 countries. But looking back on the first days of April, all three sentiment gauges we track indicated that it was an opportune time to buy. We decreased our cash position from 9% to 1% through adding companies with strong management teams, growing earnings, and high market share in their respective industries.

Market dislocation offers the opportunity to upgrade your portfolio and invest in companies that have previously been too expensive or unwarranted to purchase. Our favorite long-term themes remain and have not changed due to tariff concerns. Power and grid infrastructure, artificial intelligence, cybersecurity, the American consumer, data centers, and health care all hold significant weight in our portfolio. Tracking sentiment indicators aids in our investment decision-making by looking to be contrarian when markets are fearful. Sentiment has improved since the beginning of April, and we utilized these indicators to buy some of our favorite companies while they were on sale.

^[1] Source: Bloomberg. As of April 28, 2025.
^[2] Source: CNN. As of April 29, 2025.
^[3] Source: Bloomberg. As of April 28, 2025.