…but it is what it is

Sentiment Snapshot: Turning Tides

By Callum Thomas

So far, the recovery from the February correction is proving *not* to be a “v-shaped recovery”, and rather seems to be in a process of undertaking a classic “double-dip recovery”.  Headline risk has certainly been a driver, and at this point noise, sentiment, and signals are more intertwined than ever.  So it’s timely to take a snapshot of where sentiment is sitting across a number of key indicators including the weekly survey on Twitter.

The high level message from the equity and bond outlook and positioning surveys on Twitter is that of a gradual and material shift in sentiment from the extremes around the turn of the year.  Sentiment is immensely susceptible to being swayed simply by price, yet it can reflect a change in mood, and the perceptions around fundamentals can yield important insights.

In this respect, at once the charts show both a market that has undertaken a typical reaction to a correction in prices, while also showing scope for a further shakeout in sentiment and positioning.  This is set against a backdrop of a steady shift in the perception of fundamentals. So it’s fair to say the risks are *not* one-sided at this point.

The bullet point conclusions and observations on sentiment and positioning are:

-Equity and bond sentiment have taken a turn since the extremes seen earlier this year.

-Although “technicals” sentiment remains soft for equities, the latest results show a slump in “fundamentals” sentiment (which had previously been relatively resilient).

-Bond market “fundamentals” sentiment has already rolled over.

-Positioning indicators show some reaction, yet also show scope for a further shakeout.

-It’s a classic reaction across sentiment and positioning to a market correction, but at this point the shakeout does not look decisive.

1. Equity vs Bond Sentiment: The latest survey results show another leg down in equity sentiment (and up in bond sentiment – bond sentiment is inverted as economic logic and experience dictates that the two should roughly be inversely correlated). It is an interesting series of moves, particularly since both were coming from fairly extreme readings around the turn of the year.

2. Fundamentals vs Technicals: Honing in on equity sentiment, until the latest result equity fundamental sentiment had been holding up fairly well, yet this week equity “fundamentals” net-bullishness dropped sharply. There wasn’t much in the way of fundamental data out over the week that would seem to justify this, so it’s probably mostly jitters around a potential global trade war given recent tweets by Trump.  Technicals sentiment remains fairly bearish, which represents quite the shift vs the last few months.

3. Fundamental Sentiment: Looking at fundamental sentiment for bonds and equities, the line for equities looks to be topping out, and interestingly bond fundamental sentiment has basically rolled over.  I say interestingly because the bond investors seemed to be ahead of the curve as conditions changed from around September.  So it might be worth paying attention to what these guys are thinking.

4. US Stock Index Futures: Looking at a couple of positioning indicators (which gives the “what are you doing vs saying” angle some air time), aggregated stock index speculative futures positioning has seen a big shakeout during the correction, and that’s kind of the purpose of a correction – to shake out the weak hands.  However it’s still only around neutral, at best, and hasn’t gone totally the other way as in 2015/16.

5. Long/Short ETFs: Curiously, ETF assets under management in leveraged long ETFs has hardly moved, in fact it’s even risen since the correction, while short US equity ETF assets have been on a steady decline.  It’s possible that these instruments are being used for arbitrage or hedging or some other purpose than speculation, but if the main holders are speculators it says a lot about the scope for a further shakeout in positioning.

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