Evening Note

As I've noted herein multiple times of late, the market "internals" have been messy throughout much of what appears on the surface as a strong rally off of the March lows. I've referenced dynamics around leadership, volume, breadth, short interest, sentiment and so on. 

Today Bloomberg featured a well-written article titled Extreme Behavior Is on Display Everywhere in the Stock Market that captures much of what we've been stressing, and some. 

Here are the key highlights: 

"Frantic positioning and extreme readings in market internals show that while the S&P 500 has been nestled in a trading range for four weeks, investors remain anything but settled."

"Tiny investors are historically bullish. Last week, the smallest of options traders (those who trade 10 contracts or fewer at a time) positioned themselves to bet on a rally, buying bullish calls and selling bearish puts at a record pace, according to Sundial Capital Research.

“When we look at a group of traders who tend to be wrong at emotional extremes, the warning sign is clear,” said Jason Goepfert, the president of Sundial. “There is no data we follow that is more worrying than this.”"

"In the month of March, an average 15.6 billion shares traded across U.S. exchanges a day, the most active month in at least 11 years. Since, volume had been subsiding -- the past two weeks were the least active since late February when the selloff began. But Monday saw a pickup, with 12.8 billion shares changing hands, the most since April 30.

The size of daily price swings has also been creeping higher. While still a long way from the days of March, when stocks moved 5% a day in the most volatile month on record, the S&P 500 swung an average of 1.7% over the last five sessions, the most in nearly a month.

“We’ll have exciting days like yesterday and some down days when somebody’s treatment trial or vaccine trial fails,” said David Donabedian, chief investment officer of CIBC Private Wealth Management. “It’s impressive, but it’s still a bear market rally we’ve seen since March 23rd.”"

"Investors are throwing in the towel on value stocks, or those that trade cheaply. The latest Bank of America Fund Manager Survey shows a net 23% of respondents think value will lag growth going forward. That’s the most bearish stance on value stocks since late 2007."

So, while, per the above, it's not just us, our experience with past bear markets, our deep study of conditions and our understanding of the signaling within market internals in no way guarantees -- as our messaging of late may imply -- that the bear market's next leg lower will be soon upon us; it simply says that the risk/reward setup right here demands that we hedge our bets.