Market Hits New High, Retail Investors Are Extremely Pessimistic! The Market In September Is Destined To Be Extraordinary

The S&P 500's August performance can be described as "surging, consolidating, and continuing to rise," with both the Nasdaq recording their first monthly gains since May. During the same period, the VIX continued to decline, dropping to a yearly low of 14.1 last week and remaining below 16. Volatility lying flat indicates that traders have priced in risks ahead.

But sentiment shows a different picture. AAII's weekly survey ending August 26 shows the bearish proportion rose to 44.4%, up 4.5 percentage points from the previous week, far exceeding the historical average of 31.5%; the bullish proportion over the same period was only 32.9%, below the historical average of 37.5%. Index rises, low volatility, and retail panic — these three events happening simultaneously is, according to Goldman Sachs derivatives strategist Brian Garrett, historically bullish signals.

Why Is "Pessimism" Actually A Bullish Signal?

The premise of this logic is the inverse indicator of retail investor sentiment. AAII tracks retail investors' expectations for the next six months, and its own forty-year historical data repeatedly shows that when the bearish ratio remains above 40% or even 45%, it often corresponds to a market bottom followed by a subsequent rebound, rather than a decline feared by investors. Goldman Sachs' quantitative conclusion is more specific: after such divergences, the S&P 500 averages 1.1% return over the next month and 2.9% over three months, with a win rate of about 75%.

Wall Street calls this phenomenon the "wall of worry": the bull market climbs the wall in despair and peaks when the nation is in excitement. The mechanism behind the effectiveness of contrarian indicators is not mysterious: the cash retail investors are waiting for is the potential buying force to be replenished in the future; And when the last onlooker enters, the fuel for the rise runs dry. Panic itself becomes ammunition here.

To apply Goldman Sachs' negative signals to the present, we must first acknowledge two sets of differences.

First, the driver of this new high-level was not retail investors. From late July to the first week of August, the S&P 500 rose nearly 7% cumulatively, mainly driven by the AI theme: after Nvidia's earnings report, its market value increased by about $450 billion in a single day, and the Seven tech giants' average daily volatility reached 11%, the largest in ten years. Retail investors were precisely the spectators of the August rally, which explains why the index hit new highs but remained unmoved.

Second, macro variables are creating obstacles to mood recovery. After Walsh's hawkish speech at Jackson Hole, the market's pricing in a rate hike in September has risen to around 65%; The 10-year US Treasury yield is at 4.75%, a nearly 20-month high; Brent crude has climbed back above $90, marking the sixth month of US-Iran conflict. Retail investors' pessimism is not necessarily irrational; the rate hikes and inflation they fear are precisely what is happening.

However, September was the worst month in S&P 500 history with average returns, and combined with option prices being at their lowest levels of the year, short-term risk-return deteriorated sharply; Around September 12, listed companies will enter a buyback silence period, and retail investors' buying interest in September has always been the weakest of the year. JPMorgan Trading Desk also shifted from bullish to "tactical caution" on Monday, citing uncertain Fed paths, crowded positions, seasonal pressures, and momentum factors pulling back more than 34% from highs.

Institutional Positions Are Also "Off"

There is another overlooked layer of information on the capital side: Goldman Sachs reports show that while the index hits new highs, overall net exposure is at its lowest level since the "liberation day" in 2025. It's not just retail investors who are pessimistic; institutions are also not fully invested. This forms a set of mirror-like extremes: sentiment is extremely pessimistic, and positions are generally light.

This has a two-way impact on the market. If the macro market improves, both short retail investors and underweighted institutions have room to replenish their holdings, so the upward momentum is ample; If the macro deteriorates, with rate hikes implemented, oil prices breaking through $92, and the 10-year yield surpassing 4.80%, low positions cannot provide a buffer, and selling is actually smoother. The same signal: bulls see ammunition, bears see risk. This is precisely why September is destined for divergence.

This Friday, the August nonfarm payroll data will be released, with market expectations for new jobs to be about 55,000, compared to a decrease of 23,000 in July; the September 11 CPI and September 16 FOMC meeting will ultimately decide whether rate hikes materialize. Goldman Sachs' estimates of "1.1% increase in one month, 2.9% in three months" are historical averages, assuming "no major shocks ahead." If oil prices and U.S. Treasury yields continue to rise, historical win rates will not save the trend. In September, all contradictions will be laid out.