One Bearish Indicator Hits Its Highest Level Since 1990

The past several days have brought little in the way of relief for those hoping the trade tensions are set to abate or that, more generally, there’s a light at the end of the tunnel when it comes to headline risk associated with geopolitical tensions and domestic political strife in the United States.

Donald Trump’s Fed broadside and the read-through for FX markets further muddy already murky waters and the President’s Twitter account continues to suggest the White House feels as though it’s at war with “foes” both at home and abroad.

Tuesday’s news that the administration is set to bailout American farmers coupled with China’s fiscal stimulus push indicate that Washington and Beijing are hunkering down for a protracted war of attrition.

Against this backdrop, sentiment indicators have come down dramatically since their euphoric January peaks:

But as Goldman writes, in a note dated Monday evening, the figure above shows that “most US sentiment measures remain relatively bullish” and it’s important to remember that these indicators “were at their most bullish reading ever in January and have since come down toward more ‘normal’ levels.”

So is there any indicator that’s tipping extreme consternation? Well, yes. Here’s Goldman:

The only US sentiment indicator that seems to have turned very bearish is the CBOE SKEW index which reached its highest level since 1990 (Exhibit 3). This could either suggest that investors are looking to buy S&P 500 hedges to protect portfolios or less willingness to buy call options to position for upside.

The good news is that high readings tend to tip positive asymmetries when it comes to subsequent returns, but by definition (i.e., because these levels have rarely been observed), the sample size is small for extreme readings.

“For CBOE SKEW levels above the 95th percentile the average returns are not much better than the unconditional average”, Goldman concludes.

It should be fine. After all, you’re in good hands…

Six months from now, when the global economy crashes…

"I have never even heard of tariffs." pic.twitter.com/Nu3c3j9mQy

— Heisenberg Report (@heisenbergrpt) July 24, 2018