Wednesday, January 1, 2020

Investors Expecting A Most Happy New Year!

We recently developed our own sentiment indicator -- we call it the PWA Fear And Greed Barometer -- as a way to keep constant track of how the passengers are distributed among the investment cruise ship, so to speak.

It features 7 components: A widely-followed published sentiment index (featuring 7 components of its own), the VIX index (tracks implied volatility in S&P 500 options), VIX futures traders positioning, investment adviser sentiment (via an Investor Intelligence weekly survey), the equity put/call ratio, short interest on SPY (tracks the S&P 500) and individual investor sentiment (via a weekly American Association of Individual Investors survey).

Well, as the title of this blurb suggests, investors are feeling it right now! This morning our index scored +100 out of a possible +100! 

Suffice to say that the passengers have presently congregated onto one side of the ship. 

Now, just for fun, I just back-tested our indicator as of January 1, 2019. 

Well, ironically, given what a good year 2019 turned out to be for the stock market, investors were definitely not feeling it at the outset. Our index came in at what I'd call a panicky -85.71!

Here's from a note I wrote on New Years Eve 2018:
"All in all, frankly, worry is a good thing. I mean, there truly is something to that old Wall Street adage that a bull market is healthiest when it "climbs a wall of worry"; which has been my experience over the past 3 decades.
In essence, market sentiment is sour coming into the new year, and that's probably a good thing..."
And here were my thoughts on general conditions just a few days earlier:
"...the character of the data on balance (per our proprietary macro index) does not yet signal recession, and remains notably more positive than it was during the whopping 2011 correction, and slightly better than the 12+% draw down of early 2016...
Recall, stocks were then experiencing their worst December since 1931; here are a couple more points I made in the same blog post:
"In summary, our assessment of the present state of stock market affairs is that the price action deviates from the underlying fundamentals."
"History suggests that this -- a correction amid an ongoing economic expansion -- is the stuff strong rallies are made of."
As it turned out the market indeed rallied out of December 2018 in epic fashion, and, save for a few noteworthy dips, maintained its momentum throughout the rest of 2019.

Well, dang! If, as I said last year, worry is good a thing, then by default a +100 (extreme optimism) on our Fear and Greed Barometer isn't. And, as I've been illustrating since late summer, our macro index is now scoring notably more negative "than it was during the whopping 2011 correction, and the 12+% draw down of early 2016..."

So, I'll say it again: 

In summary, our assessment of the present state of stock market affairs is that the price action deviates from the underlying fundamentals

Although -- while the bull market may have more to run -- this time that's not a bullish statement...

Hence our move to a core mix of assets that (while they can still grow as the market advances) are not nearly as correlated to a roaring bull market as was our last.

Happy New Year to you and yours!!
Marty



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