Sentiment Section - All Star Charts -

Key Takeaway: The bulls have some heavy lifting as bears pack on the pounds. Yes, last week was impressive, as was the summer rally. But questions about sustainability remain. After all, in the wake of the greatest bull market rally in history in 2020/2021, it shouldn’t be surprising to get the most significant bear market rally ever in 2022. That leaves stocks with an uphill battle in the face of persistent macro headwinds (rising interest rates, dwindling growth expectations, and unrelenting US dollar strength). While pessimism has reached levels indicating opportunity and decreased risk for longs, downside risks remain. An increase in selling pressure could excite the bear camp, prompting a more complete unwind in equity exposure and accelerating interest in bonds even if yields continue to move higher.

Sentiment Report Chart of the Week: Bonds Unloved For Long Enough?

Quarterly data from the Federal Reserve shows investors are getting more interested in bonds, albeit from extremely low levels. Coming into this year, household exposure to bonds (as a percent of total allocation) was around 16%, a 50-year low. At the end of the second quarter, exposure had risen to nearly 18%. Equity exposure coming into this year was at an all-time high above 62% and has since dropped to 56%. Some of the shift in exposure this year reflects price volatility though in inflationary environments, stocks and bonds move in the same direction. What these shifts reveal is active rotation from stocks to bonds. Even after these moves, stocks are historically over-owned and bonds (and cash) are historically under-owned. With the tailwinds that fueled outsized gains in equities over the past decade fading, this could very well be the beginning of a generational shift away from equities and toward bonds.

[Read more…]

[PLUS] Weekly Sentiment Report

September 7, 2022 by Peter

From the desk of Willie Delwiche.

Key Takeaway: Despite the stock market’s reluctance toward sustained advances, investors have refused to throw in the towel. The bulls showed up last month, declaring their intent by triggering short-term breadth and momentum thrusts. Yet, as impressive as the display of strength was, they’re still waiting for the market to respond. Or at least the response they were hoping for. We would expect oversold conditions to reverse quickly after strong upside momentum and broadening participation. That hasn’t happened yet and bulls are showing signs of getting discouraged. If the relationship between investors and stocks isn’t going to be a two-way street, the likelihood of a broader and deeper sentiment re-set increases.

Sentiment Report Chart of the Week: Investors Not Giving Up On Stocks

Despite financial market volatility in August and evidence of increased caution showing up in options data and sentiment surveys, investors increased exposure to both stocks and bonds. ETF flow data show $28 billion flowing into equities last month and $15 billion moving into bonds. Commodity ETFs experienced their fourth month in a row of outflows. From an asset allocation perspective, individual investors have maintained above average exposure to stocks all year. This despite the talk about the equities being unloved and sentiment being at historically low levels. The first half of this year did not see the decisive move away from stocks and toward cash that was seen during previous periods of excessive pessimism (1990, 2002, 2008, 2020). The resiliency of that love affair could be tested as the optimism that emerged off of the June lows evaporates.

[Read more…]

[PLUS] Weekly Sentiment Report

August 31, 2022 by Peter

From the desk of Willie Delwiche.

Key Takeaway: In July, consumer expectations for stocks dropped to their lowest level since March 2009. Excessive optimism is clearly not an issue for stocks right here. But bulls need to be resilient if the market is going to move higher. Recent breadth and momentum thrusts are fodder for optimism, but the persistent downtrend in stocks is dampening rally attempts. The latest numbers from AAII, II and NAAIM suggest questions about bullish resolve are well-founded. All have rolled over and are showing increased caution. If that continues, a broader re-set becomes more likely – one in which positioning (which has been resilient) gets more in line with sentiment.

Sentiment Report Chart of the Week: Expectations For Stocks Have Tanked

Among the questions asked in the University of Michigan Survey of Consumers is one regarding expectations about the direction of stocks over the coming year. Specifically it asks about the perceived likelihood that stocks will rise over the next 12 months. When that data for July was aggregated, it showed the smallest probability that stocks will move higher since March 2009. That is not too out of line with some of the other sentiment extremes witnessed earlier this summer. But it also highlights the continuing contrast between sentiment and positioning. In March of 2009, the AAII asset allocation survey showed 41% exposure to stocks. In July it was at 64%. Prior to this year, the correlation between these two surveys was better than 80%, but they were further apart than ever in July.

[Read more…]

[PLUS] Weekly Sentiment Report

August 24, 2022 by Peter

From the desk of Willie Delwiche.

Key Takeaway: It takes bulls to have a bull market. Seeing cyclical sentiment moving from pessimism to neutral in recent weeks has been fuel for the rally off of the June lows. From both a fund flow and survey perspective, investors have been increasing participation since mid-year. But with a robust appetite for Risk On assets still not apparent, the biggest risk from a sentiment perspective is that macro headaches fuel an uptick in pessimism that overwhelms the positive thrust developments of the past few weeks. That could lead to a more complete unwind from a strategic positioning perspective. For now, optimism is on the rise but far from excessive, and that tends to be a sweet spot for stocks.

Sentiment Report Chart of the Week: Households Hold On To Stocks

From a short-term and intermediate-term perspective, volatility in the first half of 2022 fueled fear and pessimism that moved toward historical extremes. From a longer-term perspective, the unwind in optimism looks far from complete. Valuations remain historically elevated and while household exposure to stocks has fallen from 71% to 64% this year, its still above its long-term average of 62%. When sentiment has reached washed out levels in the past, equity exposure has tended to be below 55%. Households were reluctant to get rid of equity exposure on the way down, the question now is whether they will re-evaluate their risk tolerances now that stocks are off their lows.

[Read more…]

[PLUS] Weekly Sentiment Report

August 17, 2022 by Peter

From the desk of Willie Delwiche.

Key Takeaway: Permabulls will almost always complain about rallies being unloved, just as permabears never leave their refrain that downside risks are under appreciated. That is the prism through which they view the world. In the current situation, complacency is rising and optimism is building, both from low levels. After the buying panic seen in the NAAIM data in July, we saw something similar in this week’s data from Consensus Inc (the largest one-week increase in optimism in over a decade). Even though bears still outnumber bulls on the AAII survey, equity ETF inflows are heating up. The shift from excessive pessimism to increased optimism is the most bullish part of the sentiment curve and that is where we find ourselves. Breadth thrusts and surging momentum are cherries on the top.

Sentiment Report Chart of the Week: Strong Momentum Doesn’t Usually Just Evaporate

This study looks at instances of 40-day momentum surging from below zero to above 15%. There are exceptions to every rule, and the signals here are no different. 1987 was a mixed bag of strength and weakness, and the bursting of the Tech Bubble coupled with the 9/11 terrorist attacks and ensuing recession prevented the market from building on the momentum surges in 2001. But overall when we have seen momentum spike higher in the past it doesn’t usually evaporate overnight. Rallies have tended to persist as strength begets strength. That is a message investors seem to be hearing right now.

[Read more…]