From the desk of Willie Delwiche.
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.
My son is playing soccer right now, and one of the things I hear over and over from the coach during games are reminders to spread out and pay attention to positioning. The same is true in the market. When everyone gets bunched up in the same position, opportunities for success fade. Data through Q1 shows investors historically high levels of equity exposure. Q2 data will be out later this week and I expect the imbalance will have increased. This sort of excessive positioning can weigh on future equity market returns.