Key Takeaway: There is abundant focus on weekly and monthly surveys showing evidence of investor pessimism with regard to equities. This is at odds with the strategic positioning indicators showing that stocks are expensive and households are historically over-exposed to equities (relative to bonds, but also relative to bonds plus cash). The last two times that II bears exceeded bulls (in 2019 and 2020), household asset allocation data showed only 53% exposure to equities. As of the end of 2021, it was at 62%, an all-time high. So while investors may be identifying themselves as bearish, there is little evidence that investable cash is on the sidelines. With the Fed now raising rates and the market re-considering valuation levels, this lack of available firepower could weigh on equities. Whether today’s pessimism represents a cyclical extreme remains to be seen.               

Key Takeaway: Put/call ratios are high, there are more bulls than bears on both the AAII and II surveys (a rarity over the past decade) and active investment managers have slashed equity exposure. If the conditions that have been in place since the Financial Crisis lows (which occurred this week in 2009) are still in place, it is hard to argue that sentiment is not a meaningful tailwind for equities and is fuel for a rally. Two cautions: Sentiment is a condition, but rarely a catalyst. This means price action needs to improve to bring bulls back on board. But more significantly, there is still evidence that the speculative unwind that began last year is still ongoing and strategic positioning indicators show little improvement that would indicate longer-term risks are subsiding. Those get exacerbated as the Fed starts to raise interest rates and withdraw liquidity.        

Key Takeaway: Optimism wanes, and pessimism builds as the II bull-bear spread narrowed last week to just 1.2%, down more than 4% from the previous week. That brings the spread to its smallest difference since early April 2020. But it’s not until bears outnumber the bulls that we reach levels associated with significant market bottoms. Nevertheless, a surge in pessimism could become reality with active equity managers continuing to reduce exposure, consensus bulls dropping, and major equity indexes testing their respective January lows. Whether sentiment has completely unwound or is still in the process of unwinding is yet to be determined.

Sentiment Report Chart of the Week: Unwound or Unwinding

Key Takeaway: Speculative excesses have been unwinding for a year and that has taken its toll on investor sentiment. The overall mood is characterized by a lack of optimism rather than rampant pessimism. This is consistent with the grind lower in many areas of the market since new highs peaked in February 2021. The damage done beneath the surface has only in recent months impacted the indexes, but if that impact intensifies a further expansion in pessimism would not be surprising. Benchmark 60/40 portfolios have gotten off to their worst start in a quarter century and our strategic positioning indicators continue to point to a high risk backdrop. If there isn’t much of a reward at the end of the volatility rollercoaster, passive participants may start to actively question whether the ride was worth it.          

Key Takeaway: Sentiment has unwound to a point that it’s now seen as an opportunity rather than a risk. Pessimism runs high, investors are cranky, and we have had the most bears since 2016. On top of that, our universe of risk-on/risk-off ratios continues to lean toward the risk-off side of the scale. There are signs of budding pessimism (Consensus bulls have risen for the second week in a row and the NAAIM exposure index fails to register excessive pessimism) after the recent bounce in the major equity indexes. But without a strong enough reaction to produce meaningful breadth thrusts it’s difficult to be bullish on the broader market.       

Sentiment Report Chart of the Week: Sentiment Composite Points To Opportunity

Key Takeaway:  Investor sentiment looks washed out - at least for now. Investor sentiment was a headwind early in 2021 but more recently had been a neutral market influence from our weight of the evidence perspective. Now, with the indicators pointing toward fear and pessimism and equity inflows sputtering to start 2022, it looks like sentiment now is a tailwind for equities. How long that persists remains to be seen. Seeing pessimism and fear remaining elevated even as if stocks stop going down could help sow the seeds for an unloved rally. Longer-term, there remain imbalances from a valuation and asset allocation perspective that remain unresolved.   

Key Takeaway: US stocks are on the ropes after taking a series of heavy hits in recent weeks. This comes against a backdrop of rising volatility and fear, fueling an increase in pessimism. A complete unwind from speculative extremes is underway as a market that once bent under pressure is now beginning to snap. The silver lining is that there are still pockets of strength among cyclical/value sectors, like energy. The question is whether or not this can remain the case in the face of widespread pessimism.    

Sentiment Report Chart of the Week: Leadership Rotation Gets Energetic