From the desk of Willie Delwiche.
Key Takeaway: Fear and concern are at the tip of every investor's tongue, yet their eyes remain on the market. For all the pessimism suggested by sentiment surveys, there’s still a great deal of hope as the desperate search for the bottom continues. Yes, put call ratios are on the rise but that’s mostly driven by falling call activity as last year’s speculative exuberance evaporates. Also, investors continue to favor equities over more defensive assets such as bonds and cash despite what they say. Caution remains warranted until attitudes change or market participants are forced to avert their gaze out of disgust. After we see evidence of improved price action (and likely a series of breadth thrusts), accumulated pessimism becomes fuel for a rally, but the timing of that turn is anybody’s guess at this point.
Sentiment Report Chart of the Week: Contrarian Positioning Is To Go Long Bonds
With all the focus on sentiment indicators, it seems like being a contrarian right now is all the rage. The problem with this approach is that while investors say they are pessimistic about stocks (and the economy), their positioning tells a different story. Household equity exposure was at an all-time high coming into 2021 and despite weakness in stocks this year, equity ETF’s have continued to see inflows. Even target date funds (a popular choice for passive investors) have been increasing equity exposure in recent years. It’s a different story for bonds. As dark as the mood has been on equities, it’s been even worse for fixed income and this sentiment is actually reflected in positioning. Coming into this year, household exposure to bonds was its lowest since the early 1970’s. With yields having risen to and now pulling back from well-tested resistance as concerns about economic deterioration rise, the contrarian call might not have anything to do with stocks. It might be to go long bonds.
