Morning Note

Per this weekend’s video commentary, individual investors (save for the Robin Hoodies) remain scared, investment advisors are feeling braver, and futures traders believe it’s just a matter of time before the bottom falls out. I’ll add this morning that the latest trend in the VIX and the equity put/call ratio says options traders are feeling, let’s say, less-scared of late.

Now, a contrarian (you typically want to be a contrarian in the short-term) bear would tell you that things are beginning to look up (or down, as the case may be) when you consider that investment advisors and options traders are signaling that they think things are looking up. What might have the contrarian hesitating however is the fact that the individual investor (per the weekly AAII survey) hasn’t yet taken the bull trap bait, and that futures traders are just too stubbornly bearish.

Back to my video: Note that when we turn the clock back to the 2008 debacle, futures traders patiently held their ground and ultimately turned out to be right, in a very big way.

The thing about sentiment indicators, or any other indicator for that matter, is that they have to be considered within the context of the day. I.e., the stuff that works in bull markets doesn’t necessarily work in bear markets, and vice versa.

US equities opened notably in the red on a surge in implied volatility (the VIX opened up 10%), which of course had our hedges offsetting the lion’s share of the hit to equities at the open. As I type, however, the S&P is off a mere .25% and volatility has backed off a bunch (VIX now up just 1.5%). Ie., more of the same, for now… Which jibes with what I wrote in yesterday’s Chart of the Day post:

“The on the surface indicators that give us a feel for short-term equity market prospects are on balance supportive. I.e., while there are a few signs here and there that short-term bears may be defecting to the bull camp, there remains sufficient fear to keep the market afloat at current levels, or higher (i.e., in the short-run you’re smart to be a contrarian).”

The rest of that post, however, paints a potentially different picture going forward…


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