While on the surface Technical Analysis seems to be mainly about drawing lines on a piece of paper (or these days, a computer screen), the practice actually goes much deeper. There are other sub-studies, such as Seasonality, and understanding the human behavioral ticks when it comes to trading and investing. However, another topic that is widely discussed and also falls into the TA bucket is the monitoring of sentiment among market participants. The market is not only driven by fundamentals and price action, but also short-term sentiment shifts, which makes it volatile on a day-to-day basis.
Sentiment analysts are often referred to as contrarians. These traders invest against the majority view of the market since they believe that the markets always tend to move against the existing sentiment, sooner or later. Earlier this year, we wrote on sentiment and how bearish the general outlook has seemingly been. Yet, as we have seen, the market continues to march higher.
According to Bespoke Investment Group and the AAII survey, we saw the 4th largest spike in bearish sentiment over the past 30+ years:
The American Association of Individual Investors sentiment survey showed the 4th largest one week jump in bearish sentiment in the history of the data going back to 1987. Bullish sentiment also fell considerably.
Read more in tonight's Closer: https://t.co/LUH92q3nk2 pic.twitter.com/DZ1EqWTloY
— Bespoke (@bespokeinvest) August 8, 2019
Optuma follows up by noting that it was the largest swing since April 2013:
Latest AAII Sentiment levels swings 41% in one week from Bullish to Bearish – largest swing since April 2013. Now 48% bearish vs 21.5% Bullish: pic.twitter.com/IobtKN8RL2
— Optuma (@Optuma) August 9, 2019
Staying on the same theme, Willie Delwiche of Baird, and Nautilus Research, gave their take on the most recent AAII survey. As Willie points out, just two weeks ago the S&P 500 was at all-time highs, yet bearish sentiment has doubled and is now at the highest level since December 2018. To add to this, Nautilus Research provided a visual that says the spread between bulls and bears (according to this latest survey) is very wide and this could imply that a bottom is around the corner.
— Nautilus Research (@NautilusCap) August 8, 2019
Damon Race of Kaliber Capital Management brings to our attention that the current levels we are seeing on the AAII survey are similar to both October 2018 and June 2019:
Sentiment – National Association of Active Investment Managers. All the way down to the lower Bollinger Band. Similar levels to June 2019 and October 2018 levels. Cleansing fire. pic.twitter.com/qnxtF4mYYU
— Damon Race, CMT (@kalibercap) August 8, 2019
How far has the flight to protection gone? Below, Urban Camel gives us a couple of sentiment indicators to think about:
- The ROC of 20+ year Treasury bonds ($TLT)
- The Equity Put/Call ratio is the high it has been so far in 2019
— Urban Carmel (@ukarlewitz) August 8, 2019
Joe Fahmy of Zor Capital says he’s seeing a lot of bearishness in various sentiment readings that he personally focuses on:
Based on some of the sentiment indicators I look at, this recent drop REALLY rattled people. In Q4 of 2018 it took a while, but now it didn't take long at all. This mentality is what will continue to keep things propped up because the market tends to fool the majority.
— Joseph Fahmy (@jfahmy) August 8, 2019
He also touched on the negative outlook in this piece he wrote earlier today, stating:
“There’s a consistent pattern that tends to occur with market sentiment and it happened again this week. Here’s the pattern: The market has a nice uptrend that usually lasts 6-12 weeks. The rally usually stalls when the market and its leading stocks get a little too extended technically, and when bullishness increases based on many sentiment measures. We then see a decline until sentiment reaches extreme bearish levels or drops very suddenly. After stabilizing, the market tends to grind back up and embarrass all the people who reduced exposure, loaded up on put options, or turned “end of the world” bearish.”
According to Ryan Detrick of LPL Financial, even the hedge funds are getting seriously bearish:
Hedge funds most bearish they've been since Feb '16 (ratio net short to net long), while AAII shows bears outnumber bulls by 26.5% (previous times this wide were Dec '18 and Feb '16).
— Ryan Detrick, CMT (@RyanDetrick) August 8, 2019
So where exactly is Wall Street bullish on equities? Well, Healthcare and Real Estate are the only two areas, according to 361 Capital’s “Mood Monitor”:
In Q2, Health Care was one of only two sectors in which Wall Street sentiment was high, as 55% of all analysts’ changes to earnings estimates were upward revisions. Read more: https://t.co/9ds7vAZYIp pic.twitter.com/NRVmyfeqoI
— 361 Capital (@361Capital) August 8, 2019
Is all the worry justified? Is this indeed another October 2018, and an environment that will eventually lead to a 20% correction in broad market indices? Has the 10-year (or 6-year, or 3-year) bull market finally come to an end? It is said that bull market ends on euphoria. According to the data outlined above, and the follow-up commentary from professional technicians, it’s hard to believe that we are in that type of “overly bullish” situation. Will Lucy yank the ball away from bears again?
As always, feel free to contact us with any questions or comments.