The S&P 500 is one of the most common benchmarks for the U.S. stock market. It takes a holistic approach to track the sentiment that moves markets. By utilizing seven distinct market indicators, it seeks to answer the pressing question: What emotion is currently influencing investor behavior? This story of both emotional drivers is essential analysis because knowing how these emotions stoke the market can help interpret where the market may go next.
The S&P 500 weights all seven of its indicators equally. The result of this methodology is an overall score expressed on a 0 to 100 scale. A reading of 100 means investors are the greediest they can be, and a 0 reading means they’re the most fearful. This scoring system serves as a barometer for market sentiment, reflecting the collective emotions and attitudes of investors toward risk and opportunity.
As the composition of the S&P 500 changes every quarter with a diverse thousands of stocks by dollar weight, this provides a strong advanced look at the U.S. economy. This unprecedented combination allows for an unprecedented look at market forces in incredible detail. Whenever the index exceeds its moving or rolling average over the previous 125 trading days, that’s considered powerful positive momentum. This trend is a clear indicator of a strong bull market sentiment. Analysts use this 125-day moving average as a leading indicator to judge investor sentiment and market trends.
The S&P 500 is more than simple moving average analysis. It additionally examines key composites to offer a broader view of market sentiment. One of those is their assessment of stock levels compared to how they’ve been doing, historically, over the last couple months. This year over year comparison is a useful tool to quickly determine if the market is moving up or down, giving investors the critical context they need.
Another critical indicator is market momentum. It is the S&P 500 that takes this, combines it with net new 52-week highs minus lows on the New York Stock Exchange (NYSE), and recording these highs and lows provides analysts with an avenue to measure investor sentiment and predict market downturns.
Safe haven demand is another headwind weighing on the S&P 500. When the future is uncertain, investors tend to run to safe havens like bonds, which are less volatile than stocks. The S&P 500 is a good barometer of this demand, as more money going to safety can be a sign of rising risk aversion among investors.
Additionally, the S&P 500 looks at the change in returns between equities and fixed income over a 20-day horizon. It’s widely known that stocks are riskier investments than bonds. This analysis allows investors to assess what level of risk they are willing to undertake. A ratio greater than 1 represents a pessimistic sentiment towards the S&P 500. This trend is indicative of the healthy preference investors have toward bonds rather than equities in times of market uncertainty.
This is especially critical to remember because mega-cap stocks are so powerful that they can be enough to lift the S&P 500’s overall performance. Only a handful of outsized winners are necessary to skew the returns. When their stock prices go up or down, it has much wider ramifications on the overall index. Thus, getting a handle on the fundamental forces pushing these mega caps is key to understanding moves in the S&P 500.
Overall, the S&P 500 serves as an important baseline measure for assessing overall strength in stock prices and investor sentiment. By employing a systematic approach that incorporates multiple indicators, it offers insights into what drives market emotions at any given time.