From the desk of Willie Delwiche.
Key Takeaway: Investors are identifying with fear and pessimism as bears dominate the surveys. But we have yet to see the type of pessimism that drives market participants to do something about it. The disconnect between what investors are saying and what they are actually doing is evident in the juxtaposition of bearish surveys and elevated stock allocations. This speaks to an underlying confidence that remains unbroken and a lingering optimism susceptible to further unwind. Combined this with lackluster breadth readings, our global trend indicators nearing new lows, and a general lack of risk appetite and it’s difficult to claim the unwind in sentiment is complete.
Sentiment Report Chart of the Week: Unwind Complete When Appetite Returns
Even with historical context, identifying real-time sentiment extremes is a challenge. It is said, “nothing changes sentiment like price,” and I would add the caveat that price does not always persist. Seeing evidence that a price move can be sustained can add conviction that a durable sentiment turn has occurred. In that regard, our risk on & risk off indicators will be important guideposts. If we see evidence that risk appetite is returning, the sentiment conversation can more easily turn from unwinding to rebuilding optimism. The headfake from the risk off index is encouraging, but for now our risk-on/risk-off ratio continues its year-long sideways chop.
