Thursday, February 17, 2022

Morning Note: Sentiment's Waning (that 'might be' good) -- And -- Conditions Matter

Weekend commitments have me beginning our weekly macro exercise a day early this week. 

Seeing a number of pundit blurbs recently over the precipitous decline in investor sentiment, so I started this morning with scoring our own "Fear/Greed Barometer." 

Sentiment is considered a contrarian indicator among strategists, and, for the most part, we agree. However, like all things/indicators, we need to put it in the context of overall general conditions.

For example, the widely followed American Association of Individual Investors (AAII) weekly sentiment survey had bearish sentiment among its members at its second highest of all time on March 13, 2008:

And, make no mistake, the bulls were pounding the table back then on that number! No doubt drawing comparisons to the 1990 all-time-high in bearish sentiment that ushered in a monster upside move in stocks.

Well, not so much during the 2008 episode: The S&P went on to plunge another (it was already ~10% off its previous peak) 49% before bottoming in March of 2009:

Now, the Great Financial Crisis (2008) notwithstanding, our observations indeed conclude that extreme sentiment, on balance, has been a worthy contrarian signal over time. But we never, EVER, take these things for granted!

Our own barometer, which takes into account the AAII survey, the Investors Intelligence advisor survey (also growingly bearish), risk measures captured in the options market, short interest and commitments of futures traders just went from dead neutral to +10, which denotes a slight tilt to net bearishness, which is slightly (contrarianly) bullish...

Reports of "shots fired" inside Ukraine, and White House commentary that says "very high" probability of invasion has equities on edge this morning...

Asian stocks leaned green overnight, with all but 4 of the 16 markets we track closing higher.

The Russia/Ukraine news of course has European markets a mess this morning: All 19 bourses we follow are in the red as I type.

US stocks are off across the board: Dow down 406 points (1.15%), SP500 down 1.16%, SP500 Equal Weight down 1.22%, Nasdaq 100 down 1.29%, Nasdaq Comp down 1.22%, Russell 2000 down 1.46%.

The VIX sits at 26.58, up 9.59%.

Oil futures are (interestingly given the headlines) down 2.02%, gold's up 1.19%, silver's up 0.46%, copper futures are down 0.39% and the ag complex (DBA) is up 0.14%.

The 10-year treasury is up (yield down) and the dollar is up 0.07%.

Among our 38 core positions (excluding cash and short-term bond ETF), only 6 -- gold, silver, treasury inflation protected bonds, ag futures, solar stocks and South Korean equities -- are in the green so far this morning. The losers are being led lower by ALB (lithium miner), AMD (chip maker), MP (rare earth miner), Sweden equities, carbon credits and Nokia.

Conditions matter:
"...not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. And all a man needs to know to make money is to appraise conditions."

--Jesse Livermore 

Have a great day!

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