Powell’s Pivot, Pessimism’s Grip, and the Reluctant Bull Market

Powell’s Pivot, Pessimism’s Grip, and the Reluctant Bull Market

• Retail investor sentiment is still decidedly bearish.
• CFTC positioning data shows speculators are increasing S&P 500 shorts.
• Record money market fund assets are likely facing lower yields.

Wall Street was bracing for a storm, and Powell just handed it an umbrella…

Late last week, Federal Reserve Chairman Jerome Powell caught Wall Street leaning the wrong way. In a speech covering the economic outlook, he flagged rising risks to domestic job growth, citing downward revisions to May and June hiring data from the U.S. Bureau of Labor Statistics. While unemployment hasn’t yet ticked higher, Powell made it clear: waiting until it does could require far more stimulus than acting preemptively. He suggested the possibility of rate cuts as soon as September.

Markets responded swiftly. The S&P 500 closed within a whisper of a new high…

But here’s the twist: despite the rally, investor sentiment remains deeply skeptical. Momentum funds had been positioned for a hawkish tone. Even after second-quarter corporate earnings crushed consensus expectations, many are still unconvinced about AI’s margin potential. The mood is cautious, not euphoric.

As Sir John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Right now, we’re still seeing plenty of skepticism and pessimism. And that’s precisely what will make a rally in the S&P 500 so durable.

But don’t take my word for it, let’s look at what the data’s telling us…

Retail Sentiment: Still Doubting

The American Association of Individual Investors (“AAII”) survey—one of the longest-running gauges of retail sentiment—continues to flash caution. Last week, 44.8% of respondents were bearish on the six-month outlook for stocks, compared to just 30.8% who were bullish. That marks the 24th time in the past 34 weeks that bears have outnumbered bulls.

I like to track the bull-bear spread as a contrarian signal. Subtracting bearish from bullish sentiment gives us a –14% reading. That’s not just cautious—it’s historically consistent with market bottoms, not tops.

After briefly turning positive in July, sentiment has reversed again. We’re now approaching the same levels of pessimism seen in November 2023—just before the Fed signaled a policy pivot and the S&P 500 took off. Retail investors are still fraught with doubt. Eventually, they’ll chase.

Speculator Positioning: Leaning Short

Next, let’s look at positioning from the Commodity Futures Trading Commission (“CFTC”). The Commitment of Traders report gives us a window into how non-commercial speculators—those without hedges—are betting on market direction.

Right now, they’re leaning heavily short…

As of last week, speculators were net short 171,500 S&P 500 futures contracts. That’s nearly six times the 10-year average of –30,000. Since early July, the net short position has doubled. This isn’t hedging—it’s conviction. And it’s contrarian fuel.

We saw similar positioning in late 2023—as previously mentioned, just before the Fed signaled a policy pivot. A year later, the S&P 500 had rallied 23%. History doesn’t repeat, but it often rhymes. If the market continues to grind higher, these traders may be forced to cover—adding momentum to the move.

Money Market Assets: Dry Powder Waiting

Finally, consider the $7.2 trillion sitting in money market funds. That’s a record amount of sidelined capital. According to the Investment Company Institute (“ICI”), assets surged in April following the White House’s tariff rollout and have continued climbing.

Right now, investors can earn 4.2% to 4.4% by parking cash—roughly in line with the 10-year Treasury yield. But if you exited the market in mid-April, you’ve missed a 20% rally in the S&P 500. That’s an 18.5% opportunity cost.

And here’s the kicker: if the Fed cuts rates, money market yields will fall. Suddenly, the steady return from cash won’t look so appealing. Investors will seek better opportunities. Risk assets—especially those with earnings momentum—will become increasingly attractive.

Conclusion: The Setup for a Reluctant Chase

Powell’s pivot, persistent retail skepticism, aggressive short positioning, and record sidelined cash all point to the same conclusion: this rally has more legs. Bull markets don’t need euphoria—they need disbelief. And right now, there’s plenty of it.

Eventually, the doubters will chase. And as they do, it will underpin a steady rally in the stock market.

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