The US stock market is feeling optimistic after Trump suspended tariffs on Liberation Day. This positivity is shown in the AAII survey, where bullish sentiment has jumped to 45% from 35.1%. This rise indicates growing confidence as the market hits new highs almost every day. However, we’re still below the notable mark of 50%. Last July, bullish sentiment peaked at 52.7% before the S&P 500 saw a 9% drop due to economic worries. After that drop, the Federal Reserve stepped in, helping stock prices recover. If bullish sentiment goes beyond 52%, we should be cautious. There is still a chance that the S&P 500 could reach 6500 or even 7000. The recent boost in investor confidence, according to the AAII retail sentiment survey, serves as an early sign, not a guarantee. When optimism among individual investors rises sharply, history shows that the market often faces downturns, especially if economic fundamentals don’t back that optimism. Last year’s decline after sentiment crossed 50% is a key example. With the index nearing significant thresholds again, it’s essential to be mindful of positioning. The rise from 35.1% to 45% suggests we are entering a risky area where expectations might not align with economic realities or company earnings growth. Being close to the 50% mark raises concerns for those using leverage or holding closely correlated contracts. This kind of optimism can result in inflated valuations, increasing vulnerability to market corrections if any negative news arises. The tariff news was a clear driver this time. Trump’s decision to suspend the tariffs led to a positive market response, pushing stocks to new highs. However, we know that the narrative can shift quickly. Just a few weeks of weak labor reports or disappointing corporate results could start to reverse this newfound confidence. If the momentum continues and the S&P 500 approaches 6500 or even 7000, we may see more price swings in derivatives. Upside demand could raise premiums for both calls and downside protections. Traders are already seeing spreads widen at the longer end of the curve, indicating that sentiment isn’t the only factor heating up. When sentiment readings near 52%, we don’t wait for clear confirmation; we prepare. Risk premiums often take time to adjust, so when volatility hits, prices might already have changed. We need to keep an eye on implied volatility, especially for short-term options, to spot potential mispricings. Selling into inflated premiums can be profitable, but only if backed by hedges. It’s not the right time to be exposed without proper protection against market surprises. Some traders are focusing on buying upside exposure, especially in individual stocks with strong earnings prospects. We’re steering clear of crowded trades that seem overly optimistic. Put-call ratios in leading tech names show a one-sided trade. When these ratios dip below a specific level—like 0.6—it becomes clear where the crowd is heading. Instead, we’ve discovered better opportunities in skewed structures, where upside potential is balanced by cautious views on the downside, or through calendar spreads in rate-sensitive sectors. With the central bank considering its next moves post-recovery, even a mildly dovish signal could trigger strong reactions in fixed income futures. Keep an eye on STIRs for early signals. Changes in overnight expectations can quickly affect equity and FX-linked trades. Holding a bullish position isn’t wrong, but chasing a rally that has already stretched too far without recognizing when the crowd mentality hits late-phase levels is often unwise. It’s easy to ride the wave when the market is rising. However, it’s at moments like this—right before hitting speculative peak levels—that careful attention pays off the most. This isn’t about predicting a market top; it’s about managing risk wisely. When low summer trading volumes meet overly optimistic sentiment, liquidity can disappear quickly. That’s when option sellers or amplified long positions experience the toughest declines. Keep your charts and quantitative models handy. Most importantly, remember what happened the last time sentiment crossed the 52% threshold. We’re not there yet, but the patterns are predictable enough that waiting for full confirmation can often lead to late reactions.

here to set up a live account on VT Markets now