A rare warning signal just reappeared in the market -- and the last time it showed up, plunged more than 20% in a matter of weeks.

According to the latest AAII Sentiment Survey, the bull-bear spread has collapsed to just 0.3%, the lowest since September 2022 -- right before the S&P logged its steepest drop since the 2008 financial crisis.

That signal comes as bullish sentiment drops to 39.3% and bearish sentiment surges to 39.0%, a near-perfect split that reflects deep investor indecision. Neutral sentiment, meanwhile, remains depressed at 21.8%, well below its historical average of 31.5%. This extreme polarization often sets the stage for outsized volatility.

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Sentiment Deadlock Often Precedes Big Market Moves

When investors are evenly split, the market tends to lose its anchor. With neither bulls nor bears clearly in control, the S&P 500 becomes vulnerable to fast and sharp moves. The last time the bull-bear spread hit such lows -- in late 2022 -- the index went on to suffer its worst annual loss since the global financial crisis.

Though current market levels remain elevated, the psychological backdrop has shifted. Investors are taking sides, not sitting out, and that often signals that something's about to give.

Positioning Around The Uncertainty

For those looking to stay invested while managing risk, ETFs such as SPDR S&P 500 ETF Trust (NYSE:SPY) and Vanguard Total Stock Market ETF (NYSE:VTI) offer broad exposure. If tech optimism remains intact, Invesco QQQ ETF (NASDAQ:QQQ) provides leverage to growth themes.

For downside protection, low-volatility plays such as iShares MSCI USA Min Vol Factor ETF (BATS:USMV) or dividend-focused funds like Vanguard Dividend Appreciation Index Fund ETF (NYSE:VIG) can help buffer shocks. Tactical investors expecting short-term pullbacks may also consider ProShares Short S&P500 ETF (NYSE:SH) as a hedge.

Whether the signal leads to a repeat of 2022 or not, history suggests it's not one to ignore.

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