Retail investors are more bullish on stocks than at any point since the Fed started hiking rates. Here’s why that could be a problem.

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A popular survey of retail investors’ sentiment shows they are more bullish than at any point since March 2022, around the time when the Federal Reserve began its campaign of interest-rate hikes.

However, some market gurus fear this could be a sign that the rally in U.S. stocks that began back in October has finally run out of steam.

The American Association of Individual Investors, a nonprofit organization that holds seminars and produces reports and data for its members, revealed Thursday that the share of its members who expect stocks to rise over the next six months has eclipsed those who expect stocks to fall for the first time since March.

The latest weekly survey shows 37.5% of respondents expect stocks to rise, compared with just 25% who expect stocks to fall. The remaining 37.5% of respondents were neutral.

This is notable for a few reasons. It marks the first time that bullish sentiment has returned to its historical average level (which is exactly 37.5%) in almost 60 weeks, AAII said.

Bullish sentiment stood at 29.9% one week ago, and was as low as 17.7% back in September, as stocks were limping higher after falling to what was the lowest since 2020.

It’s also the lowest reading on bearish sentiment since November 2021, and only the fourth time in 64 weeks that the percentage of respondents with a downcast view was below its historical average.

When stretched to its extremes, the AAII survey can offer a reliably contrarian signal, a phenomenon that AAII acknowledged on its website.

“Above-average market returns have often followed unusually low levels of optimism, while below-average market returns have often followed unusually high levels of optimism,” the company said. MarketWatch was unable to reach AAII for comment.

“Bottom line, from a contrarian perspective we now need to pay attention and while not extreme and standing room only, the bull boat is getting filled up,” said Peter Boockvar, chief investment officer of Bleakley Financial Group, in a note to clients.

Others question whether the sentiment data is saying anything useful. Jeff deGraaf of Renaissance Macro Research said in a recent note to clients that “there are points” where the sentiment data matters, “but we’re not at that level.”

“I like to joke that sentiment is merely a factor of price, not the other way around,” he said.

Indeed, the spread between bearishness and bullishness shows sentiment is still mired in neutral territory.

The AAII was founded as a national nonprofit organization by James Cloonan in 1978, according to the company’s website. It has dozens of chapters around the U.S.

U.S. stocks have pulled back since the S&P 500 index hit its highest level since August on Feb. 2 amid signs that corporate earnings continued to deteriorate in the fourth quarter, while economic data, including Friday’s January jobs report, have spurred expectations that the Federal Reserve may need to raise interest rates further.

The large-cap index is on track to finish lower on Thursday after U.S. stocks erased early gains. The S&P 500 was off 0.6% in afternoon trade, while the Dow Jones Industrial Average and Nasdaq Composite were also nursing daily losses of 0.6%. All three benchmarks are heading for a weekly decline, in what would be the first for the Nasdaq in six weeks.

Retail traders have been playing an outsize role in markets in recent weeks. According to data from JPMorgan Chase & Co., retail market orders as a percent of market value reached 23% on Jan. 23. That’s higher than previous peaks seen during the run-up to the meme-stock trading frenzy.

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