Key Takeaway: A healthy level of optimism ushers investors into the holiday season. But lofty expectations are neither reflected in price nor supported by breadth. Participation is struggling to expand beneath the surface and cyclical areas of the market are retesting critical levels of support. A narrow rally running on empty leaves the market vulnerable to disappointment and could challenge high spirits. The question becomes how patient will investors be, especially since consumer sentiment is in the dumps. If the fish aren’t biting, some may prefer to cut bait.
Sentiment Report Chart of the Week: Consumers Are Cranky
Key Takeaway: Bullish sentiment is on the rise. The bears may be reluctant to leave the party, but the bulls squarely outnumber their counterparts. The AAII survey shows bulls exceeding bears by two-to-one, and the II bull-bear spread is back within a high optimism zone. At the same time, options markets reveal that volatility and fear are being replaced by complacency. Though optimism has risen sharply during the past few weeks, current levels do not present risk. However, problems may arise when the lofty expectations associated with the sentiment backdrop are not met.
Sentiment Report Chart of the Week: Risk On Buffett Lacking Calories
Key Takeaway: The bulls are back as more and more investors begin to reach for risk. Optimism is expanding across investor surveys and active equity managers have increased their exposure to levels not seen since the beginning of the year. This fresh bout of risk-seeking behavior comes as both momentum and price trends have turned bullish. Also, participation beneath the surface is expanding as the major indexes reach record highs. Combine this backdrop with a healthy number of stubborn bears and we have an environment that supports the next leg higher.
Sentiment Report Chart of the Week: Appetite For Risk Returns
Key Takeaway: There’s nothing more bullish than new all-time highs, and there was plenty to go around as we reviewed our monthly charts over the weekend. It’s no wonder that optimism is resurfacing as stocks indexes up and down the cap-scale push to new records. Whether current sentiment will develop into the type of risk-seeking fervor that brought us into the year is unseen. But bulls continue to rise, and interestingly so do the bears. The AAII and II bears ticked higher last week, with II bears reaching levels not seen since May of last year. The backdrop is turning to optimism, but there's still enough pessimism among investors to keep sentiment off of the risk side of the scale.
Sentiment Report Chart of the Week: Equity Love Affair Undiminished
Key Takeaway: There are plenty of adages to remind us that evidence of optimism re-emerging as stocks rally is neither surprising nor necessarily harmful to the health of the rally. When optimism gets overly excessive and begins to retreat we need to pay more attention to the risk side of the equation. What really caught our attention this week was that the imbalance in sentiment expressed by advisory services (Investors Intelligence) and individual investors (AAII) has been resolved. In mid-September, the AAII survey showed 22% bulls and 39% bears while the II survey had 50% bulls and 22% bears. Both surveys now show bulls in the 40’s and bears in the 20’s. Our sentiment chart of the week shows that when we’ve seen this degree of agreement between these surveys in the past, stocks have tended to do pretty well.
Key Takeaway: Sentiment remains neutral as bulls are on the rebound. Both II and AAII bulls ticked higher last week, and the 5-day put/call ratio dropped to levels indicating complacency. We may have seen the reset in optimism that was needed despite a lack of pessimism suggesting a complete unwind. With neither widespread fear nor clear evidence of sustained breadth improvement, the US is in limbo, challenging previous highs yet not confirming a breaking higher. Our suspicion is that a bout of disappointing news or earnings reports could quickly see nervousness and fear return. That could lead investors to search for better opportunities where sentiment has shifted from optimism to pessimism and breadth is clearly improving (EM, anyone?).
Key Takeaway: Optimism has been unwound, but pessimism remains scarce. We have yet to see a level of fear associated with a complete unwind in sentiment. Still, risks loom overhead with earnings season heating up and the prospect of disappointing news on the horizon. The tailwinds that have accompanied the market for the past 15-months have dissipated. Analysts no longer revise expectations higher, and breadth is weak with more new lows than new highs across the NYSE and Nasdaq combined. Caution could quickly turn into nervousness and fear without a supportive backdrop in the event less than stellar news ushers in price volatility. It’s important to remember that sentiment resets slowly then all at once. We’ve been through the slow part. Now it’s time to see if the market can withstand a potential bout of disappointment.
Key Takeaway: The risks associated with excessive optimism are no longer present as bulls are in full retreat. Recent spikes in volatility and downside pressure on price have ushered in an atmosphere of caution.Though we haven’t reached levels of fear or pessimism indicative of a complete unwind, active equity managers reducing their exposure to 55% and the II bull-bear spread at its lowest level since May 2020 speaks to a healthy reset. Relentless equity ETF inflows, elevated valuations, and slowing earnings growth all point to increased risks over longer timeframes. However, we are seeing early signs of opportunity re-entering the market from a tactical and cyclical perspective.
Sentiment Report Chart of the Week: Fade the flows
Key Takeaway: Bulls continue to retreat while bears remain relatively unchanged. The current imbalance in sentiment speaks to cooling optimism and an increasing degree of caution. In recent weeks bears have been on the rise, but so far that has been a short term event. It does not mean that all has been repaired from a sentiment perspective. On the contrary, risks remain elevated. If history is any lesson, the fear and pessimism associated with a complete unwind in optimism will not materialize without instigation from downside volatility. It’s often falling prices that lead the way and fan the flames.
Key Takeaway: Optimism has begun to cool as sentiment relieves the excesses of early summer. Yet, we are a far cry from a complete unwind that cyclical damage suggests is necessary. As investors become more risk-averse, we are looking for evidence that pessimism has become widespread and excessive (more II bears than bulls, NAAIM Exposure Index reading below 30, ETF outflows close to or below zero on a 4-week basis, and a daily close in the VIX greater than 30). Though there is certainly an increased level of caution and concern among market participants, we haven’t seen a degree of fear or pessimism in any of our indicators that point to the warranted rebalance. For now, risks remain elevated as sentiment swings toward pessimism.
Key Takeaway: Sentiment is teetering on the edge of a complete unwind. Six months of choppy markets has taken its toll on optimism and now pessimism is starting to move higher. This week’s II data could just be a shot across the bow in terms of a more cautious stance from investors, especially if the struggles seen beneath the surface make their way to the S&P 500 and NASDAQ Composite. Volatility has started to pick up but there is plenty of room for price weakness to prompt fear and re-positioning on the part of investors. For stocks, the weakest part of the sentiment curve is after optimism peaks and as pessimism becomes more widespread.
Key Takeaway: Risks remain elevated from a sentiment perspective. The bulls continue to hold court as bears are relatively absent despite their rise in recent weeks. Though there are signs that the extended reign in optimism may face a new challenge. Earnings revisions have ceased to rise, taking with it a tailwind that has accompanied the bulls for over a year. Without that tailwind, the possibility of a larger sentiment response to downside pressure on stocks increases. Lower prices have a tendency to beget a pessimistic outlook that in turn begets lower prices. This negative feedback loop could fuel a more complete unwind in sentiment than has been seen to date.
