The FOMO trade is dragging investors off the sidelines and back into stocks, but a major market peak is still far off

• The FOMO trade has returned to the market as stocks rally 20% from their lows, according to Ned Davis Research.
• But a lack of excessive optimism among investors means the stock market has yet to reach its peak.
• "Even some investors who doubt the Fed can engineer a soft landing have begrudgingly gotten on board," NDR said.

The stock market's 20% rally off its mid-October low has sparked a fear of missing out trade and pulled some investors off the sidelines and back into stocks, according to a note from Ned Davis Research.

Even amid concerns about persistently high inflation and a potential economic recession, the S&P 500 has staged its second best year-to-date rally in the past 25 years.

That rally has set up a lot of investors to be disappointed, as the conventional wisdom heading into the new year was that the weakness in stocks seen in 2022 would continue in the first half of 2023. With many investors positioned offsides for the current rally, some are starting to jump back in.

"Fear of missing out has made a comeback. Even some investors who doubt the Fed can engineer a soft landing have begrudgingly gotten on board," NDR said. But a comprehensive look at different investor sentiment data shows that while there's a FOMO trade brewing in the stock market, excessive optimism has yet to be seen.

And that means a peak in the stock market is still to come.

"The rally has pulled some investors off the sidelines, but sentiment appears to be far from the excessively optimistic levels that are often seen at major market peaks," NDR said.

One indicator that shows continued pessimism towards the stock market among investors is equity fund flows. Accordingly, investors have withdrawn $3.9 billion from equity funds over the past four weeks.

That's a big improvement from the $58 billion that was withdrawn by investors for the four weeks ending December 23, "but it still reflects a lack of conviction toward the rally," NDR said.

Some sentiment indicators like the weekly AAII Investor Sentiment Survey have turned more bullish in recent weeks, but that's after a record setting year of extreme pessimism.

With the FOMO trade heating up, and still a lack of excessive optimism in the stock market, there could be more upside ahead before the current rally stalls.

"A closer look at sentiment data shows a mixed bag. While the widespread pessimism has been relieved, investor sentiment is far from excessively optimistic levels. There is further room to climb the wall of worry," NDR said.