EBBING: Very depressed investor sentiment has been an important contrarian support to equity markets. It has added fuel to the turn up in the fundamentals and resulting sharp stock ‘pain trade’ rally. But our proprietary investor sentiment indicator (see chart) now shows this support ebbing. This likely overstates the sentiment recovery, with VIX ‘broken’ and investor allocations still very cautious, but it is another flashing yellow warning light for markets. It comes alongside rising bond yields that will put a ceiling on some valuations. We remain long term positive on markets but are starting to turn tactically more cautious on this rally’s speed and magnitude.
SENTIMENT: Our sharp sentiment index recovery has been part driven by VIX volatility plunge to under 20. This may overstate the sentiment rebound with this traditional ‘fear gauge’ now less useful as trading has shifted to options more short-dated than VIX’ 30-day focus. The AAII retail investor survey has also become a lot less cautious. 34% of those polled are now bullish and 29% bearish. This is near historic averages. But the other two indicators remain very depressed. Equities have seen $20 billion of fund outflows this year. Whilst the put/call ratio is near record highs. Broader measures also remain supportive according to latest BAML survey. Institutional investor cash levels are still high at 5.2%, and the equities underweight the biggest since 2008.
INDEX: Our proprietary 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 30-day S&P 500 volatility. 4) S&P 500 put/call ratio, measuring proportion of put buying (option to sell) vs calls (to buy). A lower number is more bullish, with more left to buy.
All data, figures & charts are valid as of 15/02/2023