Studying historical averages can produce useful and interesting insights on the market. Looking at the historical average level of the VIX we can see that the CBOE Volatility Index tends to be higher around this time of the year. We showed elsewhere that this tendency is also mirrored in US high yield credit spreads (which makes sense as they are both basically market measures of risk pricing). The key conclusion then is that there is a decent chance, based solely on historical seasonal patterns, that the VIX heads higher over the coming weeks. There are always exceptions to historical average rules, but it is something to consider given the global macro risk backdrop (stress in EM, Fed tightening, political risk, softer global growth pulse).
Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I’ll pick a couple of themes and hammer them home with the charts, but sometimes it’s just a selection of charts that will add to your perspective and help inform your own view – whether its bearish, bullish, or something else!
The purpose of this note is to add some extra context beyond the brevity of Twitter. It’s worth noting that the aim of the #ChartStorm isn’t necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.
So here’s the another S&P 500 #ChartStorm write-up!
1. The Euphoriameter: First up is a look at what’s down and that’s the Euphoriameter, it has fallen 0.31pts off the high, and while it remains elevated, we have seen a clear reset here from what were arguably too frothy levels. The big open question remains whether this is the peak or just a pullback, and for now it looks like a pullback.
Bottom line: The Euphoriameter has reset from frothy levels.
The latest weekly survey of investor positioning and views on Twitter showed a slight rebound in overall net bullishness, but as with the action in the markets, it appears indecisiveness is a key theme. Indeed the equity investor surveys showed a continuation of the starkly different views on fundamentals vs technicals – presumably this represents investors holding on to the solid macro backdrop vs the confronting correction in prices.
But in the latest set of responses to the surveys one thing that really is starting to stick out to me is the change in views toward the bond market. Indeed there has been a notable turnaround in the perception of bond investors on the fundamentals (in contrast to equity investors), and the movement in overall net-bullish sentiment for bonds looks to be highlighting a risk of a big rebound in bond yields.
Things to think about from this review of investor sentiment are:
-There remains a tension between fundamental vs technical driven sentiment.
-The other tension is the divergence between equity market fundamental sentiment and bond market fundamental sentiment, which has turned around.
-Indeed, the bond survey looks to be highlighting the risks of a more protracted reversal in yields.
-On equity sentiment the main takeaway seems to be that there is this indecisiveness where investors are still holding on to the positive macro/earnings outlook vs the noise/news and downside risks.
1. Fundamental vs Technical Sentiment: Not a huge change on the week, but there’s still a lot of information in this pair of charts. Fundamentals sentiment remains stubbornly high, albeit it does look to be slowly rolling over. Technicals sentiment on the other hand only managed a partial rebound – and as I mentioned at the start reflects what appears to be a sort of indecisiveness in the markets: on the one hand fundamentals look good, but on the other hand there’s a few things to worry about.
The March data for the State Street Investor Confidence was released this week and showed some very interesting patterns across institutional investors. The global index was up +4.7pts to 111.9 (contrasts to a reading of 95.7 back in December 2017), Across the regions, the North America index was up the most +5.8pts to 109.8, followed by Europe up 1.6pts to 102.1 and Asia up +1.3pts to 109.6. At a high level, basically what it appears to show is global institutional investors are “buying the dip”, or at least actively rebalancing into equities.
As a brief background on the indicator (from State Street):
“It measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.”
The key points on global institutional investor sentiment are:
-Global institutional investors appear to be buying the dip.
-Institutional investor confidence improved across regions, particularly in Asia and North America.
-It seems these investors are looking through the noise/news and taking the opportunity to build allocations to risky assets as the correction provides a reset of sorts
1. Global Institutional Investor Confidence Index: The latest reading of the global institutional investor confidence index reached the highest level since March 2016. My first impression of this chart (shows the indicator vs global equities) is that I can’t help but think of the phrase “buy the dip” (which sometimes includes an F in there). So the main interpretation would be that institutional investors are buying the dip, or certainly at least actively rebalancing into equities as the correction provides a reset of sorts.
As a reminder, the weekly survey on Twitter asks respondents their views/positioning on equities and bonds based on whether their view is primarily driven by the “fundamentals” vs “technicals”. It’s important to keep that fact in mind as we go through the latest results.
Indeed, the latest results showed “technicals” net-sentiment dropping to the lowest point on record, and yet “fundamentals” sentiment was little changed on the week. My first impression is that this is entirely consistent with the idea that this is a sentiment/technicals driven correction against a still decent earnings/macro backdrop.
Of course the glass-half-empty folk will say that the fundamentals sentiment will be the next shoe to drop as that crowd capitulates. It brings the equity vs bond fundamental sentiment chart into focus, and the course of that chart could well dictate how this correction ends up playing out…
Price by itself can very quickly change the tone in markets, and we saw a very clear example of that in the latest weekly sentiment survey on Twitter. With the S&P500 closing above its 50-day moving average on Friday and apparently completing a so-called “W-shaped recovery”, technicals-sentiment rebounded sharply on the week. Fundamentals sentiment also rebounded, and is part of a wider and critical set of data points which help shed light on the outlook for markets.
Indeed, equity fundamentals sentiment is running at very optimistic levels, and while it seems short-term at odds with what we are seeing in the bond survey there are a couple of key supporting points. For one, economic data has been surprising to the upside, and earnings revisions momentum has been heating up. Pair this with the backdrop of booming economic confidence, and it certainly paints a picture of supportive fundamentals.
While some of these indicators may be close to mean reverting, and the business cycle is steadily maturing, it’s a backdrop that in the near term that provides some justification for optimism in markets. And for now, as the technical analysts might say, the trend is your friend.
Everyone is Bullish. Everyone is Bearish.
Two phrases often heard in markets, and often accompanied by following quote, courtesy of Warren Buffett:
Be fearful when others are greedy and greedy when others are fearful.
Great saying, but what exactly does it mean? How do you know when “others are greedy or fearful”? And how do you turn “being fearful or greedy” into an investment strategy?
As is turns out, it’s a bit more challenging than you might think.
First, you need to define fear and greed. There are a number of different ways to do so, including: