On the surface of it, there’s something odd about claiming investors aren’t bullish enough to make a meaningful drawdown a foregone conclusion.
After all, we’ve just witnessed what, by most accounts, is the most spectacular bear market rally in history, and right in the teeth of the worst economic downturn in at least a century.
That juxtaposition alone should be enough to give one pause, and there are any number of silly visuals one can conjure to illustrate the point, the simplest of which is probably just big-cap tech versus the labor market.
“Chart crime” or no, that is quite the figure.
To be sure, there were signs of exuberance (or maybe “overconfidence” is more apt) ahead of Thursday’s rout. The S&P was overbought, and the put/call ratio looked pretty extreme, for example. Meanwhile, the financial media is enthralled with stories about Robinhood, and tales of retail investors spending their virus relief checks and unemployment benefits on shares of Hertz.
But, let’s be honest – there’s a limit to how much you can learn from torturing retail brokerage data until it “confesses” that most of the people on those platforms don’t know what they’re doing. Once you extract that confession, what do you really know that you didn’t know previously? The real surprise would be if you discovered that bored, homebound retail investors weren’t speculating in the equity of bankrupt companies and buying OTM calls.
Once you step outside of that arena, there’s not much to suggest that anyone is all-in.
By now, it’s common knowledge that hedge funds have missed out on some of the rebound. Their exposure is low (in just the ~15th %ile for global HFs, according to JPMorgan), and it’s been difficult for anyone to keep pace with equity benchmarks’ torrid run from the March nadir – just ask Paul Tudor Jones and Stan Druckenmiller.
An HFR index designed to be representative of the overall composition of the hedge fund universe was down just 2.8% through May, though, not too bad considering the circumstances. The HFRX equity hedge index was down around 8% for the year through this week, versus a 6% decline for the S&P.
As noted here on Friday, equities exposure for CTA and risk parity is low and it will take more time for the vol.-targeting universe to rebuild exposure after the epic purge that unfolded in March.
JPMorgan puts vol.-targeting exposure in just the ~5th %ile. A Nomura model puts it at a 2.5%ile since 2010.
A look at a BofA gauge of private client macro “Fear & Greed” shows sentiment isn’t anywhere near exuberant, even as it’s rebounded from levels consistent with extreme bearishness.
(BofA)
“Tax and Fed cuts drove greed, geopolitical and credit risks drove fear”, the bank’s Michael Hartnett wrote Thursday, noting that COVID-19 “fear” peaked early in May. Private client sentiment “has retraced 42% of [its] January highs but remains greater than the height of trade tensions”, he wrote.
Meanwhile, Goldman’s sentiment indicator (which measures equity positioning across retail, institutional and foreign investors) still hasn’t reached the “stretched” line.
(Goldman)
Finally, for those enamored with BofA’s pseudo-famous “Bull & Bear” indicator, it’s still in “extreme” bearish territory, after getting stuck at 0.0 for 51 days during the COVID panic.
(BofA)
As a reminder, the past five instances of “extreme bearish” readings produced somewhat mixed results in terms of forward returns. On average, the S&P was up 2.8% in four weeks, 4.8% in eight weeks, but 12-week returns are harder to pin down. The figure depicts the breakdown across five previous episodes of acute market angst.
Ultimately, the picture one gets is of a market that has, of course, staged a furious (some would call it wholly absurd) rally in the face of an apocalyptic economic backdrop, but without the figurative and literal buy-in from all of the investor cohorts that “matter”.
One could argue that leaves scope for the rally to run further before it can be charged with exhibiting the kind of outright, across-the-board euphoria that presages an imminent decline.
Of course, as one member of the Twitterati put it on Friday, we could well be just “one politician announcing a new lockdown” away from a nauseating swoon.
Stocks- you have done your readers an immense favor in showing us that at this time, little matters beyond the price action which triggers buying or selling by the models.
A lack of a flood of secondaries also suggests poor sentiment. BUT maybe there is good reason for poor sentiment. Structural growth issues, prospect for higher taxes, horrific corp bal sheets, lack of buybacks, tsunami of future equity offerings, de-globalization, peak margins, and on and on.
Prices are set on the margins. A lack of sellers has contributed to the rally in addition to shott covering and re-leveraging.
If anyone thinks dividends and return of capital will be higher now vs 3,6, 12 months ago then I would love to hear the thesis. Sure discount (risk free portion) has come down but the ERP could have an interesting surprise. If the FCF doesn’t grow or declines and dividend stay flat or decline and buybacks disappear and CF is used to pay down debt (which often doesn’t get equity benefit) it may lead to some to question why they own these.
The future cash flow pie is only so big and has shrunk relative to just a few months ago so any gains now limit future gains.
People will catch on. Maybe the “smart” money has already. Always hard to get the last hurrah.
I for one am not playing the greater fool theory. If I find value I’ll go long but for the market I just don’t see it.
Hope you all are smarter then me. Trade well my friends.
Anonymous, You are speaking my mind in this post. Thanks for this. I have long ago determined that if one does not see the future as clear as mud then I am entertaining one of many possible delusions.
Appreciate the post. Seems to me the general problem is about revenues, and I’ve yet to see a plausible theory to suggest otherwise. Hence, more disinvestment (especially layoffs), which would accelerate that topline spiral down, and almost certainly lower FCFE. That is for the good companies that don’t first become insolvent at these historic debt levels. Not sure about ERP, but if the FED succeeds in pinning the top of the capital structures to a lower bound, “reality” could find its expression in the equity tail. It’s also possible that CAPM goes the way of the dustbin, like any good theory that serves well for a time and is eventually superceded.
An unprecedented Liquidity infusion has let the Horses to the pond….. This mornings posts (thanks ) have once again pointed out the shadows of what appear to be Alligators below the surface left there by our seemingly omnipotent masters in their haste… If one were a skeptic the conclusion would be there is more room to run to the downside in this case than there is advantage to the upside.. Consulting my ever present magic 8 Ball concludes “outlook cloudy ….all signs point to yes ….please try again later ” Reversion to the mean perhaps…..??
What would it take to lose confidence in the Fed and the idea that this is a liquidity driven rally?
Could part of the exuberance be that we’re now hopefully only five months away from getting rid of the worst president (and rotten senate majority) America has ever seen??
And higher corporate taxes?