SUPPORT: Bad investor sentiment has been a contrarian help to the recent rally, and remains a key support. If everyone is bearish there are few left to sell, and many could buy. It means a little ‘less-bad’ news goes a long way. Sentiment is off its lows but still depressed (see chart). It’s only been this low a handful of times. The rebounded VIX captures attention but it’s the outlier. Other sentiment indicators remain very low. We expect the bear rally to ease. But fundamentals, from easing inflation to firm earnings, support a low being in and we’re buyers on big weakness.
INDICATORS: VIX volatility fell sharply towards 20 from a recent peak of 34 and is the lowest since August’s Jackson Hole Fed meeting. But this is a sentiment outlier. 42% of US individual investors are still ‘bearish’. This is still well above the 31% average even if well down from the September peak of 61%. Fund inflows have barely responded to the rally, flat since the October market bottom. Allocators have not been chasing the rally. Additionally, the 1.46 equity put/call ratio is the highest on our record as nervous investors seek protection from the rally reversing.
INDEX: Our proprietary composite sentiment indicator is made up of 1) equity mutual fund and ETF flows. 2) The long running American Association of Individual Investors (AAII) sentiment survey. 3) VIX index of expected S&P 500 volatility. 4) S&P 500 put/call ratio, measuring the proportion of put buying (option to sell in future) vs calls (to buy in future). Whilst not part of our index, we also cross-check versus the NAAIM hedge fund exposure to US equities index and news-based economic policy uncertainty indices. Both are similarly off lows, but still depressed.
All data, figures & charts are valid as of 07/12/2022