Uncomfortably Comfortable, Or, Getting Tipsy…

Amid all of the fancy fundamental and technical analyses firms like ours perform and peruse, we must never lose sight of the simple fact that what we are truly analyzing — to repeat the gist of our August 5th message — under all circumstances, and with no exceptions, are the actions and reactions of human beings; on behalf of themselves and their families, on behalf of their business interests, and on behalf of the political posts/parties they occupy — the world over.

Peering through that lens, I periodically line up the indicators (those that present a definable equity market sentiment signal) we track and assign each a “mood”. I.e., what does each suggest about the prevailing sentiment among those influencing its data. 

Among the plethora of exercises we perform to gauge the ever-evolving risk/reward setup across tradable markets, this one — when considered against the prevailing macro backdrop — from a timing standpoint may be the most important. 

Why? Because it identifies what I’ll call the distribution of the passengers presently aboard the ginormous financial markets cruise ship. You see, when the majority begin migrating to one side of said ship, the party side, that is, risks of titanic proportion begin to build — particularly when the party’s raging and the bar’s fully stocked…

So here I’ll perform my exercise in real time and we’ll together assess the current risk/reward setup from a sentiment standpoint. I’ll color-code to emphasize each market signal:

  • Credit Markets (11 inputs aggregate): Rising Confidence
  • Stock Market Breadth and Volume (13 inputs aggregate): Neutral 
  • 3-month equity sector relative results (11 inputs aggregate): Confident
  • Futures Traders Positioning (ones that pertain):
    • SP500: Slight net fear
    • Nasdaq: Confident
    • Russell 2000: Confident
    • Treasuries: Neutral
    • VIX: Confident
    • Gold: Fear
    • Silver: Neutral
    • Copper: Confident
    • Dollar: Fear
    • Yen: Fear
    • Euro: Confident
    • Aussie: Fear 
  • Short Interest:
    • Amazon: Confident
    • Microsoft: Confident
    • Google: Neutral
    • Facebook: Neutral
    • Apple: Confident
    • SPY: Confident
    • NYSE: Confident 
  • Volatility Indices (15 inputs aggregate): Declining (less fear)
  • Investment Advisor Sentiment: Confident
  • Individual Investor Sentiment: Rising, but still net Fear
  • Put/Call Ratio: Confident
  • CNN Money Fear/Greed Index: Greed (confidence)
  • Equity Market Momentum; weekly technical analysis (7 inputs aggregate): Confident
  • Foreign Fund Flows to US Equities: Confident
  • Foreign Fund Flows to US Treasuries: Neutral
  • Foreign Portfolio Flows to US: Fear
  • Net Flow to US ETFs: Confident
  • PWA Financial Stress Index (8 inputs aggregate): Confident

While there’s clearly some healthy concern still showing up in a few market pockets, confidence has definitely been on the rise of late. I.e., the boat’s getting a bit tippy, or tipsy, to one side.

To punctuate today’s point, here’s from something I posted in our internal research thread yesterday:

“Here’s what I said on 3/23:

“A bill will absolutely pass, today or tomorrow, it’s a virtual certainty.” 
“All cynicism aside, people indeed will need it badly, and the market will love it”

By the way, the day I made that comment, short interest was hugely high, and everyone was on the bear side of the boat…

Given the internals at the time, and the pending stimulus, it was a no-brainer to call “the first” bottom in my view… VASTLY different setup today!!

I followed that “market will love it” comment in the same commentary with: “– that is for a second, a minute, a day, a week, even a month or longer — but ultimately folks, per my earlier Quote of the Day, you can only defy economic gravity for so long.”

That last part (5 months later!) has yet to play out of course…

Now, here’s Goldman Sachs on 3/22:

“In the near-term, we expect the S&P 500 will fall towards a low of 2000. The stock market is a leading indicator of business trends, and corporate activity continues to deteriorate with no signs yet of a bottom. The first quarter has not even ended and companies have yet to release 1Q results but equities have already collapsed by 32% in one month. The speed of business erosion is unprecedented.”

Yesterday the same Goldman analyst raised his S&P target to 3,600!

Yep, team, we have to always ALWAYS do our own work! 😎”

Suffice to say folks, when Goldman made their 3/22 dire market call (the day before the market embarked on an epic rally), our sentiment assessment — in direct conflict with Goldman’s near-term prediction — was the brightest of greens! I.e., everyone was on the fear side of the boat; a little good news (which we anticipated) could easily have them rushing all at once toward the other (greed) side of the boat; pushing stock prices way higher in the process.

Today, however, as I reported to the PWA team yesterday, and to you above, the setup is “vastly different”. In fact it looks uncomfortably like the comfortable sentiment our analysis was detecting just before the market rolled over in February. Ironic how Goldman — in conflict with present sentiment signaling (in a contrarian sense) — has just turned bullish. That’s what I’d call “chasing the price”, and — with all due respect to the venerable old Wall Street firm — it’s a (the) most-dangerous way to manage money…

We’ll keep you posted…




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