SENTIMENT: The reversal rally this year by the 2022 losers has been painful for most investors who have stayed cautious. Our composite sentiment index is below average and a contrarian support to markets. It leaves many able to boost stock holdings as the fundamentals continue to be ‘less bad’. It even understates the level of actual pessimism given the big falls in the ‘broken’ VIX volatility index. We see an accelerated economic and inflation slowdown leading to early rate cuts. Forward looking, and long-duration focused, markets will likely benefit from this move.
INDEX: Our equal weighted proprietary investor sentiment index measures 1) fund flows, 2) retail sentiment, 3) the put/call ratio, and 4) VIX. Overall equity ETF and mutual fund outflows have been remorseless, with only three weeks of net inflows this year. Whilst the proportion of AAII survey retail investors bullish is only 26% versus a long-term average 37%. The S&P 500 put/call ratio has eased but still with above average number seeking downside protection. Other sentiment indicators support our view. The NAAIM hedge fund exposure index is below average and falling. Whilst measures of global and US economic policy uncertainty remain very high.
VIX: The Cboe S&P 500 VIX volatility index is the one sentiment outlier. It’s the lowest since Jan. 2022, below its long-term average of 20, and down 20% this year. But this 30-day implied ‘fear gauge’ does not well reflect the shift to very short-dated options trading. Over 50% of S&P 500 options trading is now in 0- or 1-day options. We see higher S&P 500 volatility ahead as the market grapples with crosswinds of a faster economic and earnings slowdown vs lower inflation and interest rates. The VIX is negatively correlated with the S&P 500 and is ‘convex’. Meaning it does not fall by as much as it gains when markets sell-off, making useful for hedging purposes.
All data, figures & charts are valid as of 17/04/2023