This is our ASC Research Q3 2021 Playbook.

With the current market environment giving us many mixed messages, what better time to dive in and see what's happening underneath the surface?

• Stocks (International & U.S.)
• U.S. Sectors & Industries
• Market Breadth & Sentiment
• Commodities
• Currencies
• Intermarket Analysis
• Crypto Currencies
• New Trade Ideas
• Overall Strategy

We've also made it really easy to navigate through this 242 page report by organizing the tabs for you. So be sure to open the PDF and use these tools to make your life easier.

Enjoy!
 

When there aren't any bears left, the market has a funny way of creating new ones.

That's been one of the biggest questions from me over the past few weeks. Where did all the bears go?

Meanwhile, which asset class have investors been piling into the most this year?

From the desk of Willie Delwiche.

Key takeaway: Record highs in equity indexes buoy investor sentiment that has remained optimistic without a significant challenge over the past year. Bulls ticked higher across our sentiment indicators last week, yet we still see evidence that risk appetite is turning (NAAIM Exposure Index, NASDAQ trading volume, overall levels of options activity). These new highs and levels of optimism must contend with the undercurrents of lackluster breadth measures and an absence of pessimism. Risks lie just beneath the surface. This raises the possibility of a more complete sentiment unwind when risks are realized and prices begin to falter.

Sentiment Report Chart of the Week: Know What They Say, Watch What They Do

One of the best ways to measure actual sentiment is to watch what investors are doing with their money. Through the first six months of the year, equity ETF inflows totaled nearly $350 billion, with inflows to...

Where did all the bears go?

Have you noticed?

There aren't any left...

From the desk of Willie Delwiche.

Key takeaway: Last week’s volatility unwound some near-term complacency, but there is still plenty of evidence of optimism in the system. Active managers increased their equity exposure and equity ETFs continue to attract inflows at a staggering pace (though certain sectors are starting to see outflows). A more challenging breadth backdrop poses a challenge, but with economic data continuing to surprise to the upside and earnings expectations being revised higher, excessive optimism may be slow to unwind. While risks are elevated from a sentiment perspective, they are not yet being manifested in terms of price. 

Sentiment Report Chart of the Week: Large Tech Outflows

Outflows among tech stocks spiked to their highest level since early 2019. The recent spike comes after historic inflows and speculative exuberance took hold of the market. Now the market environment is portrayed by waning trading volume and...

From the desk of Willie Delwiche.

Key takeaway: From a breadth perspective, the market is challenged right now by a scarcity of new highs. From a sentiment perspective, it has to contend with a scarcity of bears. Options data shows complacency even as risk appetites remain diminished. Bears on both the II and AAII surveys are near their lowest levels since 2018 and ETF inflows remain elevated. The household equity allocation tilt (versus bonds) is its most extreme since 1972. Stocks are loved, bonds are hated. All of this is very well summarized by our chart of the week from the Bank of America Fund Manager Survey which shows virtually no one is expecting (or prepared for) market volatility in the months ahead.

Sentiment Report Chart of the Week: Missing Bears 

It takes bulls to make a bull market, but it takes bears to help sustain it. The Bank of America Fund Managers Survey found only 2% expect a correction >20% in the next six months, emphasizing...

From the desk of Willie Delwiche.

Key takeaway: Excessive optimism has been slow to unwind and most of our indicators are back to signalling a high risk environment from a sentiment perspective. Individual investors last week showed the fewest bears since January 2018. While complacency abounds, investor risk appetite remains shy of where it was in March, even with the uptick in speculative activity over the last two weeks. Liquidity conditions have been tightening of late and momentum trends are diverging from price trends. While the apple cart has not been upset, the load is perched precariously and one small stumble could send fruit flying in all directions. It’s not a low-risk load on which to ride.

Sentiment Report Chart of the Week: Shifting Leadership?

The decade-long trend of US outperformance remains intact. However, more and more information points toward a possible trend reversal. The S&P 500 ETF $SPY breaks to new lows relative to Eurozone ETF $EZU.  Further weakness in...

From the desk of Willie Delwiche.

Key takeaway: Sentiment continues to shift away from optimism and toward pessimism, though as with anything it is not a straight line. Speculative activity is flaring up again this week, the trend in trading volumes and call activity suggests less risk appetite on the part of investors. Optimism unwind is happening in the context of elevated longer-term risks, with earnings growth expectations and valuations at elevated levels. A sideways summer that cools optimism and helps relieve valuation pressures could help pave the way for the resumption of a cyclical rally later this year.

Sentiment Report Chart of the Week: Diminishing Highs

As optimism fades, so does the number of new 52-week highs in the S&P 500. It takes bulls to make a bull market, and from a tactical perspective, our sentiment and breadth measures suggest the bulls have already left for summer vacation.

From the desk of Steve Strazza @Sstrazza

Earlier in the week, we held our May Monthly Conference Call, which Premium Members can access and rewatch here.

In this post, we’ll do our best to summarize it by highlighting 5 of the most important charts and/or themes we covered, along with commentary on each.

Let’s get right into it!

From the desk of Willie Delwiche.

Key takeaway: Sentiment continues to shift from optimism to pessimism. Unlike the March optimism unwind, the current situation is associated with a waning risk appetite on the part of investors and a more challenging liquidity environment. This argues for patience from a tactical perspective and warns against a premature conclusion that the speculative excesses have been removed from the system. While the pullbacks in some of the speculative areas may seem substantial, they still pale in comparison to the run-ups that were seen in late 2020 and early 2021. In such an environment, less may be more. Surviving such unwinds is not only about preserving capital, but also maintaining mental health.

Sentiment Report Chart of the Week: Risk Appetite Wanes

High-yield corporate bonds are beginning to roll over relative to their safer alternative. This indication of cooling risk appetite is one of the key differences between the sentiment reset last March...

From the desk of Willie Delwiche.

Key takeaway: Amid the economic optimism that is seen in surveys and magazine covers, the stock market is experiencing an unwinding in speculative excesses that has just begun. This shift in risk appetite makes a healthy sentiment reset like we saw in March a less likely outcome this time around. More probably is that we are moving from excessive optimism to some meaningful degree of pessimism. This is the area of the sentiment curve when price is most vulnerable to correction. With upside economic surprises waning and near-term breadth trends more mixed, the choppy environment of the past few weeks could not only persist, but even intensify. 

Sentiment Report Chart of the Week: Magazine Covers

Like headlines, magazine covers can be more anecdote than an indicator. But they do give a sense of the public mood and the contrast between what appeared on the cover of The New Yorker in March 2020 (an empty Grand...

From the desk of Willie Delwiche.

Key takeaway: A peak within the NASDAQ (or the Technology sector) shows that pockets of speculative excesses are being unwound. There has been enough strength in the market elsewhere, as well as a still favorable earnings and economic data backdrop, to keep investors generally optimistic. In March, market volatility allowed optimism to retreat from excessive levels but not completely unwind. We may be seeing early indications that the current bout of volatility will have a more substantial impact on investor psychology. If so, the price reaction will likely not be as benign as was seen two months ago.

Sentiment Report Chart of the Week: Unwinding Speculative Fervor

The Nasdaq has been the leader off the March 2020 lows during the speculative beta chase that ensued. However, excessive optimism has come off a full boil and it shows in pockets of breadth deterioration seen in the former leader. While more than 40...