Key takeaway: Another bout of late-month market volatility produced quickly frayed nerves. The VIX spiked and put/call ratios moved away from excessive complacency. Our tactical sentiment indicators point to still-elevated optimism even as sentiment surveys have eased recently. Risks arise when breadth deteriorates and a sustained shift from optimism to pessimism emerges. We are not seeing this yet. The $78 billion of equity ETF inflows in February (over the past two months equity ETFs have seen daily net outflows on only 3 occasions) suggests excessive investor positioning, but the risks inherent in that have not yet been manifested. Despite last week’s volatility, cyclical sector leadership persisted and defensive areas made new lows. That does not suggest investors are moving quickly to a risk-off posture.
Sentiment Chart of the Week: XLU/SPY & XLP/SPY Ratios
Two of the most defensive sectors, Utilities and Staples, made new lows relative to the broader market last week. These ratios depict a risk-on environment that supports higher prices in stocks.
