STAX retail investor sentiment is the most bullish in four years.
The latest Schwab Trading Activity Index (STAX) has risen to its 86th percentile, the highest since 2022.
That sounds worrying.
But the historical signal is more nuanced.
STAX has worked well as a contrarian indicator. Bearish retail sentiment has been followed by above-average equity returns, while bullish sentiment has tended to precede weaker returns.
The latest reading is certainly moving in the more vulnerable direction.
But it is not a red flag yet.
Past retail sentiment peaks have been considerably higher. And while readings around today’s level have historically been followed by below-average 12-month equity returns, the average is skewed by a few outliers. The hit rate has been much less convincing.
The more reliable sell signal has only appeared at higher levels.
A STAX above 68 has historically been followed by significantly below-average equity returns, with a high hit rate.
We are not there yet.
A few more snippets from the latest report:
- The strongest net buying was in Technology, followed by Communication Services and Consumer Discretionary.
- The biggest net selling was in Consumer Staples, Financials and Health Care.
- The buy-the-dip mentality remains alive. Schwab noted that the heaviest buying coincided with the mid-month market pullbacks.
Bottom line
Retail investors are getting more bullish. That removes some of the previous contrarian support, but STAX is not yet flashing a clear warning signal.