How durable is bullish sentiment?
Or, put differently, how much would it take to break the spirit of market participants who have been conditioned, Pavlov style, to buy any dip no matter how small?
On one hand, flows data from last week suggests that investors are predisposed to jumping ship at a moment’s notice. Outflows from SPY were enormous as the money that flowed into stocks in January flowed out seemingly at the first sign of trouble.
On the other hand, SVXY saw a veritable avalanche on inflows during the week suggesting that either i) the buy-the-dip mentality as manifested in sell-the-VIX-rip is still alive and well, ii) morons will be morons, or more likely iii) a little bit of both.
Meanwhile, the debate rages on about whether BTFD is officially dead. On Sunday evening, a letter from Goldman’s co-head of global equities trading Brian Levine began making the rounds and the money line (figuratively and literally) was this:
But longer-term, I do believe this is a genuine regime change, one where you sell-the-rallies rather than buy-the-dips.
Well if that is indeed the case, then Monday gave everyone a rally to sell and if Wednesday’s CPI print comes in hotter-than-expected, well then fuck me runnin’ – look out below.
Of course there are innumerable ways one can go about gauging the resilience of bullish sentiment, but Goldman is out with a couple of possibly useful nuggets, including the following the chart which shows that while the put-call skew is up, “it’s only in its 72nd percentile relative to the past year, suggesting investors are not yet paying extreme prices for puts relative to calls.”
Additionally, the bank notes that although the “put volumes increased relative to calls on Thursday and Friday, sending the put-call volume ratio to 1.31, its highest level since the US Presidential election”…
… a simple look at call open interest relative to puts (i.e. leaving aside prices and volumes and just grabbing a snapshot of positioning) shows that hilariously, retail money (as represented by SPY) is still extremely bullish relative to history (the institutional equivalent is near its 4-year average):
So you can interpret that as you see fit, but taken together, it certainly seems to suggest that while signs of angst did indeed manifest themselves late last week, we’re nowhere near panic mode.