From the desk of Willie Delwiche.

Key Takeaway: At last week’s CMT Symposium, the lack of bulls and high number of bears on the AAII survey was probably the most oft-cited single statistic by the symposium speakers. This week’s data confirms that pessimism. II bears reached their third highest level in the past decade and put/call ratios haven’t been as high as they are now since the COVID crash. Beneath the surface, however, there is evidence that investors haven’t actually thrown in the towel. The AAII Asset Allocation survey for April shows that while they said they were bearish last month, individual investors were actually increasing equity exposure. The spike in the put/call ratios meanwhile has more to do with collapsing call volume than surging activity in puts. Bearish sentiment extremes are difficult to identify in real-time, that’s why it’s typically best to go with the crowd until it has reversed. 

Sentiment Report Chart of the Week:  What They Do > What They Say

The 4-week average of Bulls on the...

From the desk of Willie Delwiche.

This All Star Charts +Plus Monthly Playbook breaks down the investment universe into a series of largely binary decisions and tactical calls. Paired with our Weight of the Evidence Dashboard, this piece is designed to help active asset allocators follow trends, pursue opportunities, and manage risk.

In Focus for May: The first four months of 2022 have been a trying time for many investors. But while stocks have experienced their worst start a year since before the S&P index was expanded from 90 stocks to 500 stocks, the decline in the index has actually been a relatively normal correction. It’s premature to suggest that the lows are in, but the 13% decline in the S&P 500 from its peak is in line with the median experience of the last 9 times (dating back to the late 90’s) that the S&P 500 experienced a decline of 10% - 20% (less than 10% isn’t considered a correction, declines of more than 20% usually get characterized as bear markets).

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From the desk of Willie Delwiche.

 

From the desk of Willie Delwiche.

Key Takeaway:

• 2022 gives investors no place to hide.
• Stocks do well when rates rise slowly - an aggressive Fed is a headwind for investors.
• Hard to argue that a bear market has run its course when more stocks are making new lows than new highs.

The future’s market now expects 50 basis points of tightening at this week’s FOMC meeting to be followed by another 75 basis points of tightening at the June meeting. On top of the 25 basis point rate hike in March, that would be 150 basis points of tightening in just three meetings. It’s been a long time since the Fed moved at such an accelerated pace. For equities, not all tightening cycles are created equally. Stocks can hold up well when the Fed is pursuing a deliberate pace, but tend to suffer in periods when the pace of rate hikes is rapid....

From the desk of Willie Delwiche.

Key Takeaway:  The lack of a meaningful rebound in price sustains a subdued atmosphere across the market. Sellers continue to drive prices lower and equity put/call ratios are on the rise. But due to the overwhelming decline in call volume this speaks more to a lack of risk appetite than outright fear. While pessimism is certainly present and has reached levels associated with opportunity, there is still plenty of room for sentiment to unwind. Current conditions carry significant risks with lackluster price action and  equity ETFs starting to experience net outflows (three weeks in a row and four of the past five weeks). Simply put: we have not seen significant evidence of capitulation. Just because the recent market environment has been tough doesn’t mean it can’t get worse.

Sentiment Report Chart of the Week:  Is “As Bad As It’s Been” Good Enough?

Recent selling pressure has pushed the NASDAQ 100 into negative territory on a year-over-year basis. That has been unfamiliar...

From the desk of Willie Delwiche.

Key Takeaway:

• Downside volume surge shows selling accelerating.
• Risk backdrop argues for caution.
• A new environment requires an adaptive playbook.

Our risk indicators continue to make the case that this is a risk-off environment. 14 of the 20 asset pairs we look at in our Risk Off vs Risk On indicator have the risk-off component within 10% of new highs. The tilt toward risk off leadership is intensifying. This is echoed in our relative strength rankings, which show Energy slipping and Utilities and Consumer Staples (defensive sectors) taking over the top two spots. Four times as many NASDAQ stocks have been cut in half as have rallied 50% from their 52-week lows. The improvement seen here during the rally off of the March lows has been all but undone. We have continued to see more stocks making new...

From the desk of Willie Delwiche.

One of the refrains I heard coming into 2022 was that, given inflation, holding cash was an expensive proposition. It is true that over the past year, inflation has eaten away 8.5% of the real purchasing power of the dollar. But it has only taken the market 75 trading days this year to reduce the value of stocks and bonds by an even larger nominal amount. Surging inflation is prompting an aggressive policy response from the Fed, pushing bond yields higher and weighing stocks and bonds. Passive investors have seen their portfolios stumble to their worst start to a year in the past quarter century. There is a challenge brewing for the passive index-based investment approaches that have soared in popularity in recent years. Holding cash in inflationary environments does come with a cost, but it has the benefit of flexibility in the face of uncertainty. And the way it looks right now, holding stocks and bonds has been even more expensive.        

This is the video recording of the April 21st Weekly Town Hall w/ Willie Delwiche.

04/21/22 2:00 PM ET

 

From the desk of Willie Delwiche.

Someone recently asked me why I pursued the CMT (Chartered Market Technician) designation. 

Was it for personal growth or to open up job opportunities? To be honest, fifteen years after the fact it's difficult to fully recall every motivation that went into my decision. I can, however, clearly see the implications of that decision.

In many ways, this is similar to what happened when my family and I moved from the Milwaukee suburbs back into the city itself. We had our motivations and expectations, but none of that could have prepared us for what we have experienced in the wake of that decision.

It was 2008 and we were in the depths of the financial crisis. Plenty of uncertainty was in the air. We sold our old house literally days before Lehman went under and the financial system seized up. We thought we were just buying a house, one that our young family could grow into. It had "good bones" (as they say) but had been ignored for some time and needed (still needs) a lot of loving attention.

From the desk of Willie Delwiche.

Key Takeaway: That investors are in a dour mood is not in doubt. We just saw the fewest bulls on the AAII survey since 1992 and the University of Michigan Consumer Sentiment Index is about as low as it has ever been. This week has brought news that US equity ETF’s have had outflows in three of the past four weeks. If this is just a pause in what some have called the persistent bid fueled by a move toward index investing, then this too is a bullish development. If, on the other hand, it represents the early stages of passive equity investors becoming disgruntled and looking for other options, then consider it a meaningful increase in equity market risk. Time will tell, but price and breadth improvements would help assuage these concerns. Either way, pessimism is a condition that needs a catalyst to spark a rally. It’s a pile of firewood, but for now it remains unlit. 

Sentiment Report Chart of the Week: Conditions Need Catalysts

A pile of wood does not alone make a campfire. You...

From the desk of Willie Delwiche.

Participating in strength so far in 2022 provides us with some operational flexibility in our Dynamic Portfolios. But in a market with relatively narrow participation, it can be challenging to find ways to move from strength to strength without becoming too concentrated. That said, we are reducing exposure to some of the strongest areas of the market - taking gains more than expecting weakness. We are finding opportunities to maintain our current exposure to the market, increase our diversification and remain consistent with the message of caution coming from our risk indicators and the weight of the evidence. This remains an environment that favors a dynamic over passive approach and one in which being tactical and cyclical enhance strategic exposure.

From the desk of Willie Delwiche.

Key Takeaway:

• Optimism fades as risk off reigns.
• Inflation hopes spring eternal.
• Beneath the global trends it’s Pax Britannica.

The hope that emerged from the epic March bounce and the promise of seasonal tailwinds has run into the harsh reality that the breadth backdrop remains challenging and the risk environment has not meaningfully improved. Simply put, this was not the April the bulls were looking for. Optimism has been nipped in the bud (AAII bulls dropped to their lowest level since 1992 last week) and our longer-term risk on /risk off indicator has fallen back toward its March lows. But nothing is actually that straight forward. Looking within our US Risk Off Index, we see three of them are at or near new highs, while two are breaking down to new lows. Even within areas that typically move...